USDA Rural Development (RD) Loan
Rural Development (RD) financing is perhaps the most misunderstood home financing offered in the United States today. It, however, provides probably the best terms for home financing available. Best of all, this loan features the NO MONEY DOWN option.
Who and what is Rural Development?
Rural Development, formerly known as Farmer's Home Administration (FmHA) is a part of the United States Department of Agriculture (USDA). The USDA has the unique responsibility of coordinating Federal assistance to rural areas of the nation. The Rural Development mission is to help rural Americans improve the quality of their lives. One aspect of this mission is the financing of safe, decent and affordable housing.
A new and sharper focus on rural development took shape with the passage of the Department of Agriculture Reorganization Act of 1994. One of the new Rural Development organizations reporting to the Under Secretary for Rural Development is the Rural Housing Service (RHS) whose primary responsibility includes rural housing programs.
In what areas are Rural Development loans available?
You may be surprised where RD financing is available. The home does not have to be in the country. The home may be located inside the city limits of selected communities of generally less than 10,000 population. In some cases, communities up to 25,000 population are eligible for RD financing. The best advice is to check your property's eligibility on the USDA Web site.
How much money will I need for a down payment?
No down payment is required!
Is this fixed rate financing?
Yes. RD does not offer or allow adjustable rate mortgages. The 502 Guaranteed Rural Housing loan rate is fixed for 30 years.
What kind of home can I buy?
New and existing homes are eligible. There is no restriction as to design or size of the home. The home, however, must be SAFE, SOUND, and SANITARY and meet RD energy efficiency standards. This is a very common sense approach with the buyer's interest in mind. Homes with in-ground swimming pools are not eligible. When homes have acreage, the number of acres included with the property must be determined to be reasonable for the area. Generally, the value of the acreage should not exceed 30% of the total value of the purchase price. The local RD office makes this determination. Keep in mind, RD finances homes, not farms or ranches. Just use common sense. Call us or your local RD office if you have questions about acreage.
Are there loan limits?
No, not on the 502 Guaranteed Rural Housing Loan. Income limits are still in place, but the impact will be significant. A qualified buyer can buy as much house as his or her income and debts will allow. Up to 29% of gross income may be spent on housing and when combined with other monthly obligations may equal up to 41% of gross income.
Are there income limits?
The 502 Guaranteed Rural Housing Loan program income limit is generally based on 115% of the median county income adjusted to family size. Rural Development provides a Web site where you can check your income eligibility. Please contact us for assistance. (The Web site requires the use of Internet Explorer.)
Best advice: Don't automatically assume you don't qualify. To determine adjusted income, RD allows potential borrowers to deduct from their gross income select amounts based upon the number of dependents in a household. Childcare expense, un-reimbursed medical expense exceeding 3% of gross income, and other factors are considered in determining eligibility. Best of all, these deductions are ignored when payment ability is determined. You get to use your gross income to qualify for the home even though the gross amount may be above the local county income limits.
What about closing costs?
Even though RD is a "nothing down loan," there are closing costs. However, the seller can pay all or a portion of the closing costs and prepaid items and any remaining closing costs may beadded to the loan up to the appraised value of the property. If any cash is required of the borrower it can be 100% gifted. In addition, many communities have home grants which pay a major portion of the closing costs. What this can mean is a low cost or zero move-in cost to the borrower. It is definitely possible to get into a new or existing home for no money out-of-pocket.
Best advice: Contact us on how to structure your financing to ensure all closing costs and prepaids have been covered.
Do I have to be a first time homebuyer?
No. Rural Development loans are available to all that qualify. You do not have to be a first time home buyer. However, you cannot own two homes.
What about my credit?
While it is important that your credit be good to qualify, it by no means has to be perfect. As a basic guideline, if you have declared Chapter 7 Bankruptcy, it must be discharged a minimum of 3 years. All outstanding collections and judgments must be paid. Our goal is to determine your willingness and ability to pay your house payment, not find ways to deny your loan.
Best advice: If you are not sure how your credit looks, find out. You can request a free copy of your credit report once a year. If you still have concerns about your credit, contact us.
What if I have no credit?
If you have no credit, that's OK. The lack of credit is not necessarily a reason to deny a loan. Many factors are used to determine your willingness and ability to pay a house payment. Don't assume you don't qualify. Give us a call and find out.
My credit is good, by my spouse's credit is terrible.
Can I get a loan by myself?
Yes. This is referred to as a Non-Purchasing Spouse Loan. If you meet credit and income guidelines by yourself you may be able to purchase a home. Your spouse's credit is disregarded. Note however, that if your spouse's credit is disregarded, his or her income will not be counted in determining repayment ability. You must qualify by yourself.
How does this loan compare to FHA or VA?
FHA, VA, and RD loans each have their individual advantages. Below are some comparisons:
RD vs. FHA
- FHA has up-front mortgage insurance of up to 1%. This is added to the loan amount. RD has a 3.5% guarantee fee on the 502 Guaranteed Rural Housing loan.
- FHA has an annual mortgage insurance (MIP) of .9% of the loan amount. This increases the monthly payment. RD does not require mortgage insurance.
- FHA has a required minimum move-in cost to the buyer of 3.5%. RD is "Nothing Down."
- FHA limits the loan amount to the sales price or the appraised value, whichever is lower. RD allows the loan amount to exceed the sales price up to the appraised value of the property.
RD vs. VA
- VA has a minimum 2% funding fee (unless the veteran is disabled). RD has a 3.5% guarantee fee on the 502 Guaranteed Rural Housing loan.
- VA offers "Nothing Down," but you must be a veteran. RD offers "Nothing Down" to any qualified borrower who purchases a home in eligible areas.
- VA limits the loan amount to the sales price or the appraised value, whichever is lower. RD allows the loan amount to exceed the sales price up to the appraised value of the property.