Do you have clients who have the income and reserves to buy a home, but not the down payment? If they live in the right area, a USDA loan could be a perfect option.
USDA loans (also referred to as Rural Development loans) are backed, directly guaranteed or insured by the Department of Agriculture to support affordable housing in less developed areas.
In this article, we’ll review this loan’s benefits as well as its key qualification guidelines. Its key benefits include down payment flexibility and competitive rates on guarantee fees, the USDA equivalent of mortgage insurance.
Zero percent down
The first major feature of a USDA loan is the ability for homebuyers to get into a home without a down payment. Although not limited to first-time homebuyers, this could be particularly attractive for younger buyers who have a steady job, but not much in savings.
If buyers have an existing USDA loan, they can take advantage of a rate-term refinance to get lower rates without the need for existing equity. Cash-out refinances aren’t available.
Low guarantee fees
Guarantee fees are much lower than the similar fees on loans backed by the FHA. Let’s do a quick comparison:
- With a USDA loan, there’s a 1 percent upfront guarantee fee compared to a 1.75 percent upfront mortgage insurance premium (MIP) for FHA loans. In both cases, buyers can finance the upfront fee in their loan.
- USDA loans carry a 0.35 percent guarantee fee on the unpaid principal balance each fiscal year. For FHA loans, buyers pay an annual 0.85 percent MIP fee if they made a minimum 3.5 percent down payment on their home purchase.
USDA loan qualification requirements
As with any loan, USDA loan borrowers must meet certain requirements to qualify.
In order to take advantage of this loan option, homebuyers need to be looking to buy a single-unit primary residence in a qualifying area. These can be rural areas or even the outskirts of suburbia. The USDA has an eligibility map on its website (areas not in orange are USDA loan eligible). Working farms do not qualify.
USDA loans also come with some financial requirements.
Homebuyer household income can’t exceed more than 115 percent of the area median income. If the household includes more than four members (adults and children), it may qualify with a slightly higher income. Homebuyers can deduct childcare expenses from this income tabulation, as well as income from a portion from any adult full-time student.
The USDA doesn’t specify a minimum credit score for its loan, but lenders may have their own policies.
For the best chance at qualification, it’s a good idea for homebuyers to keep their debt-to-income (DTI) ratio – a comparison of minimum debt payments to overall income – at or below 45 percent. Lenders may have their own guidelines on this metric as well.
If you have any questions or would like more information on how the Quicken Loans Agent Relations team can help you and your clients, call (888) 980-4601 or email us at AgentRelations@QuickenLoans.com. You can also visit us at RealEstate.QuickenLoans.com.
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