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Buy a home with USDA

By ReShawna Leaven

Real Estate Agent with KW United | Alexandria/Kingstowne

July 31, 2020 02:25 PM

Buying a Home with USDA

No down payment
No prepayment penalty
Finance closing costs into the loan
Flexible credit guidelines
Lower fixed interest rate
Geographical restrictions
Income limits
PMI is included (guaranteed fee)
Single family homes only, no duplexes

USDA Loan Requirements

Minimum credit score of 640 is preferred. However, scores from 600-639 may be allowed if our automated underwriting determines creditworthiness.
Income cannot exceed 115% of your area’s median household income. This program is designed for low to moderate income households.
Property must be located in an eligible rural area as defined by the USDA – Check Eligibility
Property must be your primary residence and cannot be income producing.
The USDA program is designed for those who do not own other properties.

USDA Loans Require Mortgage Insurance (MI)

USDA “guarantees” its loan program — meaning it offers protection to mortgage lenders in case USDA borrowers default. But the program is partially self-funded. So to keep it running, the USDA uses homeowner-paid mortgage insurance premiums.

As of October 1, 2016, USDA has lowered its mortgage insurance costs for both the upfront and monthly fees.

The current USDA mortgage insurance rates are:

For purchases, 1.00% upfront fee paid at closing, based on the loan size
For refinances, 1.00% upfront fee paid at closing, based on the loan size
For all loans, 0.35% annual fee, based on the remaining principal balance
As a real-life example: A homebuyer with a $100,000 loan size in Blacksburg, Virginia, would be required to make a $1,000 upfront mortgage insurance premium payment at closing, plus a monthly $29.17 payment for mortgage insurance.

USDA upfront mortgage insurance is not paid as cash. It’s added to your loan balance for you.

USDA mortgage insurance rates are lower than those for comparable FHA loans or conventional ones.

FHA mortgage insurance premiums include a 1.75% upfront mortgage insurance premium, and 0.85% in MIP annually

Conventional loan private mortgage insurance (PMI) premiums — even via the 3%-down HomeReady™ program — can range above one percent annually

Is there mortgage insurance (MI) on a USDA loan? USDA loans require mortgage insurance (MI) to be paid. As of December 4, 2019, USDA mortgage insurance premiums include a 1.00 percent upfront fee, which is added to your loan balance at closing; and, an annual fee of 0.35%, which is added to your payment monthly.

What’s the maximum USDA mortgage loan size? There is no maximum loan size for the USDA loan program. The amount you can borrow is limited by your household’s debt-to-income.

The USDA typically limits debt-to-income ratios to 41%, except when the borrower has a credit score over 660, stable employment, or can show a demonstrated ability to save.

Is the USDA loan program limited to first-time buyers? No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers.

Can I finance the Upfront Mortgage Insurance into my mortgage? Yes, the USDA will let you finance your Upfront Mortgage Insurance payment into your loan size.

For example, if you bought a home for $100,000 and borrowed the full $100,000 from your lender, your Upfront Mortgage Insurance would be $1,000. You could then raise your loan size to $101,000.

I recently went back to work. How long until I am USDA-eligible? If you are a W-2 employee, you are eligible for USDA financing immediately; you don’t need a job history. If you have less than 2 years in a job, however, you may not be able to use your bonus income for qualification purposes.

I am self-employed. Can I use the USDA loan program? Yes, self-employed persons can use the USDA Rural Housing Program.

If you are self-employed and want to use USDA financing, as with FHA and conventional financing, you will be asked to provide 2 years of federal tax returns to verify your self-employment income.

Can I do a “cash out” refinance with the USDA program? No, the USDA Rural Housing Program is for purchases and rate-and-term refinances only.

Can I use the USDA loan program for my working farm? No, the Rural Housing Program is for residential property.

Can I use the USDA loan program for a new construction home? Yes, the USDA loan program can be used for newly-built homes and other new construction.

Can I use the USDA loan program to make repairs and improvements to an existing home? Yes, the USDA loan program can be used to make eligible repairs and improvements to a home. This may include replacing windows or appliances; preparing a site with trees, walks, and driveways; drawing fixed broadband service to the home; and, connecting water, sewer, electricity, and gas.

Can I use the USDA loan program to make a home accessible to persons with physical handicaps? Yes, the USDA loan program can be used to permanently install equipment to assist household members with physical disabilities.

Do I have to escrow my taxes and insurance with a USDA mortgage? Yes, USDA mortgages require borrowers to escrow taxes and hazard insurance with a lender. You may not pay your real estate taxes or annual homeowners insurance separately.

Can I use the USDA loan program to make energy-efficiency improvements to a home? Yes, the USDA loan program can be used to purchase and install materials meant to improve a home’s energy efficiency, including windows, roofing, and solar panels.