It might seem a bit odd at first that that United States Department of Agriculture has a mortgage program. Yet the USDA loan is probably the “go to” source for certain types of properties located in rural and semi-rural areas. Lenders like the USDA program because it allows them to finance homes in areas where a conventional loan just wouldn’t work. Why is that? One of the more important aspects of loan approval is supporting the value of the subject property. The primary way this is accomplished is with the completion of an appraisal report.
When an appraiser begins the report, one of the first things to do is compare the sales price listed on the sales contract with other homes that have recently sold in the area over the last 12 months. Technically, there should be at least three such properties as well as show homes that are currently listed for sale.
Further, the identified comparable sales, or “comps,” should be relatively close to the subject property, somewhere within a one-mile radius. If there aren’t any comps, or not enough, a conventional loan might not make it past the finish line. It’s important to note that a mortgage loan approval includes approving the applicants as well as a separate approval of the property. Both have to work.
Finding three similar properties that have sold within the past 12 months in a rural area is often a challenge. The USDA loan program is tailor-made for these types of properties. Lenders who have the USDA program in their portfolio of loan programs are able to make more loans than they otherwise would not be able to make.
What is considered rural and non-rural is determined by the United States Census Bureau when the census is taken every 10 years. The Bureau reviews these areas and identifies a rural area. The subject property must be located within these areas. Potential buyers should contact their loan officer and provide the property address. The lender will then look up the address and determine whether the home is eligible for the USDA mortgage.
An interesting point about location requirements is that a home might be in an eligible area that looks nothing like a rural area. Due to “urban creep” where a community’s boundaries expand as the population grows, soon there can be more houses built in an area deemed rural several years ago. The lender doesn’t review the property and the neighborhood to determine location eligibility but instead looks up the address to see if it qualifies.
Finally, lenders like the USDA program because the loan is guaranteed. This guarantee fee means should the loan ever go into default the lender will be compensated for the loss. A conventional loan has no such guarantee. The guarantee is financed by two separate forms of mortgage insurance, an upfront fee called the Guarantee Fee and an annual fee paid in monthly installments. The upfront fee is not paid for out of pocket but instead is rolled into the final loan amount.
On the other side, borrowers are big fans of the USDA program for much of the same reasons. One of the big attractions of the USDA program is that no down payment is needed. There is only one other government-backed, zero-down loan program. That loan is the VA loan. However, the VA mortgage is restricted to certain borrowers. If someone has not served it the armed forces, the VA loan is not an option. The USDA loan is offered in the most common residential mortgage program found today, a 30-year fixed rate term.
Household income is also considered and should not exceed 115% of the area’s median household income. In addition, the USDA loan can only be used to finance a primary residence and cannot be used to finance a rental or investment property. While the USDA doesn’t mandate a minimum credit score, most lenders ask for a minimum score to be 620 or better.
Borrowers love these loans because they can finance a home in a rural area where a conventional loan could not. Because there is no down payment there is less cash needed to close on the transaction and the program is offered as a 30-year fixed rate loan, the most common type of loan in the industry. If someone is considering a rural or semi-rural area, the USDA loan should be in the mix of loan choices.
Please call us today at the number above to learn more about 100% USDA Rural Housing loans.