USDA Home Loans
The USDA Loan
In the past a USDA home loan from the United States Department of Agriculture (USDA), was thought of as being a farm loan. Today, that couldn't be further from the truth. USDA loans can be used to purchase property in almost any area of the country outside of the major metropolitan cities. Rural and even many suburban areas qualify for these no money down loans.
The only terms offered in with a USDA loan are 30 year fixed rate.
Advantages of a USDA Loan
USDA loans are a great option for middle to low income Americans to buy a home with no money down.
USDA home mortgages are the only no money down home loan offered by the federal government to non-veterans.
To qualify for a USDA Guaranteed Rural Housing Loan you must not have a household income higher than 115% of the median household income in your area.
If you live in Spokane County with a 1 to 4 person household, your annual household income may not exceed $73,600 per year. If you live in a 5-8 person household in Spokane County, $ 97,150 is the maximum annual total household income.
Maximum Loan Amount
There is no maximum dollar amount for a USDA loan, but there is a maximum debt to income ratio, as well as maximum household income limits.
Debt to Income Ratio
How much you can borrow with a USDA loan depends on your debt to income ratio. With USDA loans, there are two important numbers, and they are expressed as 29/41.
The first number is your total housing expenses divided by your gross monthly income. Total housing expenses include principal and interest payment, as well as property taxes, homeowners insurance, mortgage insurance, and any homeowner's association dues. This total must not exceed 29% of your gross monthly income.
The second number is total monthly recurring debt divided by gross monthly income. Total recurring debt includes all the housing expenses from before, in addition to auto loans, student loans, credit card payments, and any other monthly recurring debt. The total on these expenses may not exceed 41% of your gross monthly income.
Credit Score Requirements
USDA loans have fairly liberal credit requirements. You are required to have a minimum credit score of 620. For more information on credit scores you may read the article on credit scores.
Out of Pocket
With a USDA loan you may not need a down payment. A USDA loan can be for up to 102% of the appraised value of the home. There is a 2% funding fee to guarantee the loan that will be financed, so this leaves the actual appraised value for the loan. If the closing costs added to the cost of the home do not exceed this number, there is no need to bring any money to the table.
There are closing costs associated with a USDA loan, but as mentioned above, they can be rolled into the loan and financed over the life of the loan. The amount of the closing costs varies from loan to loan. Some of the costs are fixed, and some depend on the amount of the loan. Some closing costs even depend on when you close.
You can approximate an additional 3% to 4% on top of the borrowed amount for closing costs on a USDA loan. Closing costs are discussed in greater detail in another article. There is a link to the right that will lead you to this article. After reading the article on closing costs, you will better understand them and come up with a more accurate approximation.
There is no mortgage insurance with a USDA loan. It is actually not an insured loan, but a guaranteed loan. The 2% funding fee that is charged up front, but paid off over the life of the loan is to guarantee the loan.
Types of Purchases
USDA Loans are meant for owner occupied homes. They may be used to purchase single family houses, condominiums, and manufactured homes. You may not use a USDA loan to purchase multi-family homes, such as duplexes.
written by:Todd Hays