The USDA Home Loan program is one of the most utilized loans available – for those who qualify. The qualification process for these loans, however, has gotten a little harder in 2018, and they’ve issued some subtle, but important USDA Home Loan Guideline Updates.
General USDA Home Loan Guideline
USDA Home Loans are not made by the USDA, but they do insure the bank against a loss if you stop making your payments. Because the US Government is making this guarantee, the program offers some of the best mortgage rates available. The PMI cost on these loans is also very low.
There’s NO DOWN PAYMENT REQUIRED. We use to tell folks that you could get into a home using USDA Home Loan financing with $100 out of pocket. Those days are gone.
You should have at least 2.5% of your sales price set aside for your portion of the closing costs. There are too many people looking for a home, and not enough of them on the market – so the chance of a Seller taking an offer where they need to pay closing costs is slim (I’m just being honest with what we are seeing right now). The money for the closing costs can be a gift (or a series of gifts) or it can come from the sale of a bass boat (for instance), but you can’t get an unsecured loan for it (not coming from your credit card).
To qualify for a USDA Home Loan, you need to:
- Purchase a home that is in a qualifying rural part of NC. Every county in NC has some portion that will qualify for the program – some counties like Harnett, and Randolph and Johnston County – have a LARGE area that qualifies. These maps are changing at least once a year, and has we have more folks moving a little further out of our metro Cities like Raleigh and Charlotte, we are finding that the incorporated city limits of Holly Springs, and Wake Forest are seeing the homes that qualify shrinking.
- You must be under the income limit for the County in which you are buying. Again, this is a moving target that changes generally during the 4th quarter of each year. It is based upon the number of folks in the household, and even if your spouse (for instance) isn’t on the mortgage, the income from all sources must be used to be certain you are under the limit.
- You need to have decent credit. This is a 100% mortgage, and the credit is going to be underwritten conservatively because of that. If you have a pretty high number of monthly debts, or you have some credit dings in the recent past – this might not be the program for you. In general, we are seeing files with 680 credit scores and low debt sail through on a Computerized Underwriting Basis, and 620 to 680 credit scores work on a Manual Underwriting basis. With Manually Underwritten files the risk is higher, so the mortgage rates are slightly higher. And it takes a few extra days because the whole file has to go to USDA for them to also underwrite (two underwriters, means you will be asked for more conditions, just how it goes).
USDA Home Loan Guideline Updates 2018
The USDA Home Loan Guideline has very limiting opportunities for someone to use a Power of Attorney (POA) to close. Most mortgage programs allow us to use a “substitute” at the closing table who is related to the borrower, or who the borrower has given a very specific Power of Attorney that allows you to close on a home in NC, even if you are still in California (for instance). However, USDA Home Loans will not.
Most loan officers I spoke with were not familiar with the USDA Home Loan Guideline Updates of POA, and this is not something you want to find out about it at the last minute!!
A Power of Attorney (POA) may only be used with a USDA Home Loan for active duty military and/or if a borrower is incapacitated.
A Power of Attorney (POA) may be used when we are able to verify and document that all of the following requirements have been satisfied:
- For military personnel, a POA may only be used for one of the applications (initial or final), but not both:
- when the service member is on overseas duty or on an unaccompanied tour;
- when the Mortgagee is unable to obtain the absent Borrower’s signature on the application by mail or via fax; and
- where the attorney-in-fact has specific authority to encumber the Property and to obligate the Borrower. Acceptable evidence includes a durable POA specifically designed to survive incapacity and avoid the need for court proceedings.
- For incapacitated Borrowers, a POA may only be used where:
- a Borrower is incapacitated and unable to sign the mortgage application;
- the incapacitated individual will occupy the Property to be insured; and
- the attorney-in-fact has specific authority to encumber the Property and to obligate the Borrower. Acceptable evidence includes a durable POA specifically designed to survive incapacity and avoid the need for court proceedings.
USDA Home Loan Guideline for Home Owner’s Insurance
The maximum hazard insurance (Home Owner’s Insurance) deductible is the greater of either $1,000 or 1 percent of the policy coverage. This is important to note, because folks try and get the highest deductible as possible to keep their payments lower.
Borrower occupied properties should have replacement cost coverage in an amount equal to the insured value of the improvements or the unpaid principal balance with deductible(s) which does not exceed the greater of either $1,000 or 1 percent of the policy coverage.
It has been brought to our attention a little known requirement on flood insurance for government-backed loans that we feel is important for everyone to be aware of. For FHA Loans, USDA Home Loans, and VA loans – If a borrower is required to obtain flood insurance (as determined by the flood certificate), they MUST obtain a policy through the National Flood Insurance Program (NFIP).
Private Flood Insurance Policies are NOT accepted.
USDA Home Loan Guideline for Qualifying Property
USDA wants to be sure the mortgages are only made on properties that are safe for personal residences. If you are buying a farm, there are other USDA Loans that would apply.
To meet this goal, the USDA sets basic property requirements that protect home buyers as well as lenders. These property requirements include:
- The home must be used as the homeowner’s primary residence
- The site must have direct access to a street, road or driveway
- The property must have adequate utilities and water and wastewater disposal
A final consideration is that the USDA loan cannot be used to purchase an income-producing property. You can have horses on the land, but it’s not for commercial equestrian use.
However, if the property includes barns, silos, commercial greenhouses or livestock facilities that are no longer used for commercial operation, the property may still be eligible.
Additionally, USDA has a Land to Value of the House ratio that it uses. The USDA Home Loan Guideline for Property states that the Value of the land can not be worth more than 30% of the total purchase price. Let’s say the Original price for the whole deal is $100,000. If there’s a “commercial” barn, and the appraiser deducts $10k for the Barn – now they are saying that the HOUSE has to be valued for at least $63,000 for this to work ($90,000 times 70%). If the appraisal shows the house is worth $42,000 and the rest of the value is the 18 acres of land… no deal.
If you have questions about purchasing a home in NC that’s located in a USDA area – and you have questions about a USDA Home Loan Guideline update, please call Steve and Eleanor Thorne 919 649 5058 we do tons of these loans, and we KNOW the underwriting requirements for a USDA loan! Connect with us on Google Plus or Facebook!