Rural Development Q & A

What is a Rural Development loan?

A rural development loan is a 30 year fixed mortgage guaranteed by the US Department of Agriculture (USDA) which allows homeowners to purchase a home with no down payment, and in some cases, it even allows the closing costs to be financed into the loan.  The loans are intended to target low to moderate income borrowers that want to live in USDA targeted areas.  The Federal Government guarantees the lender up to 90 percent of the loan against losses if there is a default on the loan, thus enticing lenders to do the loans.

Is there an acreage limitation on Rural Development loans?

USDA likes to keep the acreage to 30% of the total value of the home and land.  If the value exceeds the 30%, it is still possible, but difficult. 

Are Rural Development loans only available in rural areas?

While the rural development loans may target rural areas, their definition of a rural area is probably larger than what most people consider rural.  For instance, all of Moss Bluff, Westlake, & Iowa qualify. In addition, south of Gauthier Road in Lake Charles and areas south of I-10 in Sulphur also qualify.

Are there eligibility limitations for whom can get a Rural Development loan?

In order to qualify for a USDA loan, the lender typically wants a 620 or higher score.  There are income limitations and requirements for the loans, so you have to make enough to qualify for the financing, but can't make too much to be eligible for their guarantee.  For Calcasieu Parish in 2011, a family of 4 needs to have an AGI under $74,050, and if the family has 5 or more, they can make up to $97,750.   Typically, USDA prefers that you have a total debt ratio below 41% and a housing ratio of 29%, but we have had many loans approved with ratios above that with good compensating factors such as credit, time on the job, and lack of payment shock.   USDA does not allow you to own multiple residences and the purchase must be for a primary residence only. 

How would home financing be affected if the purchase were lower than the appraised value?

If a home does not appraise for the purchase price, the customer must either pay the extra amount down to the appraised value or negotiate with the sellers a lower purchase price. 

What is PMI and why is it not required for Rural Development loans?

In the past, the USDA did not require monthly mortgage insurance (MI) since they charged an upfront funding fee.  However, as of October 1, 2011, the USDA now charges a small monthly fee in addition to their upfront  fee.  This change is due to all the foreclosures nationally and subject to change.  The USDA is still considered by most to be a better option than the government's FHA loan since the monthly fee is still considerably less than the government's FHA loan, and the customer can get the mortgage with little or no money out of pocket.