Homebuyers looking to secure a mortgage may find help from the
U.S. Department of Agriculture (USDA) -- and they don't even need
to plow a field to be eligible.
Two USDA loans -- the
Single Family Housing Guaranteed Loan
and the
Single Family Housing Direct Loan
- are available to a range of potential homebuyers, including some
borrowers who are buying in areas that many would characterize as
"suburban."
The biggest lure of
USDA home loans
compared with other mortgage products is that it is one of the few
mortgage programs available today that requires no down payment.
The concept behind USDA loans is to encourage homeownership among
low- to moderate-income families in locations that are not densely
populated.
"Not only does this program help people buy a home, but it also
builds the local tax base because of the property taxes paid to the
local government by homeowners," says Kristine Steinbach, a loan
officer with Inlanta Mortgage in Pewaukee, Wis.
Lenders say a USDA mortgage can be a good alternative to an FHA
loan because the cash requirements and insurance premiums are lower
for USDA loans. Scott Johnson, divisional president of the
Northeast division of Prospect Mortgage in Trumbull, Conn., says
that while the program is geared to single-family homes, the loans
are available on town homes and condominiums provided they meet
USDA requirements.
Financing costs
"The advantages of the USDA program are huge, especially because
borrowers without a lot of cash can skip making a down payment,"
says Joseph Theisen, branch manager for Fairway Independent
Mortgage in Sun Prairie, Wis. "The mortgage insurance is much lower
than FHA mortgage insurance, too."
USDA loans have mortgage insurance of 0.3 percent, or $3 per
$1,000 borrowed. On a $100,000 loan, the mortgage insurance would
be $300 per year, or $25 per month as part of the mortgage
payment.
Borrowers are charged a funding fee of 2 percent of the loan
amount, such as $2,000 on a $100,000 loan. That fee can be wrapped
into the loan.
Mortgage rates
on a USDA loan are comparable to typical market rates for other
loan programs, says Steinbach.
"Homebuyers should look at all the available mortgage programs
to determine which one is best for them," she says. "USDA is often
the best option, but the program is limited by location and by
income."
USDA loan qualifications
Before you assume that your area isn't "rural," be sure to check
with a mortgage lender to see if the property you want to buy is
eligible, or search on the USDA loan eligibility site by ZIP code
or a specific address. Steinbach says most areas with a population
of 20,000 people or less should be eligible.
Each property must also be appraised and meet livability and
safety standards set by the USDA.
"A [Single Family Housing Guaranteed Loan], restricted to
borrowers with a maximum of 80 percent or less of the median income
for your area, must be applied for and approved by your local USDA
Rural Development office," says Steinbach. "A [Single Family
Housing Direct Loan], restricted to borrowers with up to 115
percent of the median income, is available from lenders who offer
this loan program."
There are no maximum loan limits because the income eligibility
restrictions automatically limit the amount that can be
borrowed.
"The income from everyone in the household counts toward the
loan," says Steinbach. "Even if someone's name is not on the loan,
if they will be living in the property, their income must be part
of the qualification process."
Credit score
Credit qualifications for a USDA loan are similar to FHA
loans.
"Most lenders require a credit score of [at least] 640 or 620 to
approve a USDA mortgage," says Steinbach. "USDA says borrowers need
a score of 580 or above, but lenders typically want a higher score
than that. Borrowers with a credit score of less than 640 or 620
might qualify for a 'credit waiver' if they have some compensating
factors such as a solid job history or a low score because of
limited use of credit."
Steinbach says lenders do not require borrowers with a credit
score above 640 to have a specific amount of cash reserves.
However, borrowers with a lower credit score need at least three
months of principal, interest, taxes and insurance payments in the
bank.
"As a rule of thumb, the housing payment should be no more than
29 percent of gross income and the overall debt-to-income ratio
should total 41 percent or less," says Theisen. "If someone has a
high credit score or a good job history, they might be able to
qualify with a slightly higher debt-to-income ratio."
Theisen says the USDA program is not limited to first-time
homebuyers, but is geared to meet the needs of new buyers.
"The only disadvantage to this program is that without a down
payment, the buyers may not have much equity for several years,"
says Theisen. "If they know they will be in the property for the
long term and will be paying down the balance over time, then even
that isn't really a problem."