USDA announced some clarification on existing guidelines as well as adding some new guidelines; all of which are effective with new USDA Home Loan Applications the summer of 2016. The USDA Home Loan Guideline changes that we receive the most questions about are the ones regarding the way USDA Loans NC look at Student Loan Debt – however, there are several other significant changes as well.
USDA Home Loans NC may well be the best mortgage program available for those who are able to meet the income restrictions, and are interested in living in a more rural area of NC. The program offers some of the best mortgage rates, and has very low monthly “PMI” Factors,” which are scheduled to go lower in October of 2016.
Because of that, the payments – and therefore the ability to qualify for a slightly bigger home, makes the USDA Home Loan NC a very popular program. It does have it’s “quirks” and so I’ve tried to highlight some of the USDA Loan Guideline changes the Summer of 2016.
USDA Loans NC and Student Loan Guidelines
Most mortgage programs require us to count some form of Student Loan debt in our qualifying Debt to Income ratios. USDA Home Loan NC underwriters are the most diligent, and require that we prove that the payment is actually a fixed rate mortgage payment.
Effective March 9, 2016 the USDA Student Loan Guidelines state that we must calculate qualifications as follows:
“Include the greater of 1% of the outstanding loan balance or the verified fixed payment reflected on the credit report. Income based repayment plans (IBR), graduated repayment plans, adjustable, interest only are all subject to change & the lender must use 1% of the outstanding loan balance as the payment amount.”
Many Loan Officers do not realize this is the case – because of that, borrowers are being told they qualify for a USDA Home Loan, when in fact they don’t. If your student loan payment is in deferment right this minute (and you are applying for a mortgage) we are required to count 1% of the balance.
USDA Home Loan Guideline Changes 2016
Nontaxable Income: May be grossed up 25% for repayment income, this 25% is an across the board amount regardless of what tax bracket the borrower is part of.
Gifts: No longer a restriction on gifts from household members.
Reserves: The term “reserves” refers to the amount of money left over after closing. For a long time now, we’ve seen that the automated approvals in GUS reserves must be the recent 2 month average balance of liquid accounts. Gift funds are not included in the reserve total; if the borrower has overdraft or NSF’s on bank accounts, no reserves are allowed to be listed. (THIS IS A BIG CHANGE IN GUIDELINES)
Credit Score Validation: At least one applicant whose income & assets are used for loan qualification must have 2 trade lines that have existed for 12 months (these can be open or closed accounts). If the borrower(s) do not have this the loan must be downgraded to a refer & manually underwritten.
Distance between well & septic: Must meet either local/state code or HUD Handbook 4000.1
Flood Insurance: Coverage must equal the lesser of the outstanding principal loan balance or the maximum coverage allowed under NFIP. Also unless a higher amount is required by state law the maximum deductible should not exceed the greater of $1000 or 1% of the face amount of the policy.
2016 High Debt Ratio USDA Loans NC
There is a component of USDA Loans that allow for “Common Sense” Underwriting. Because of that, we are allowed to use a USDA Debt Waiver when we have a total DTI (Debt Ratio) higher than the USDA 41%
IF the Bank Underwriter feels that the borrower should be considered for a USDA Home Loan Debt Ratio waiver, then the home buyer will need the following:
- A middle credit score of at least 680. (The Co-borrower needs a middle credit score of at least 620). If the Borrower has a middle score of at least 680, and there’s no evidence of payment shock, and the total debt is over 41% but less than 45%, then it’s an automatic approval for the USDA Home Loan Debt Waiver. If the borrower has ratios that are within the 29/41 guidelines, then we can easily get a loan approved with median credit scores of 620 to 640.
- If the middle credit score is over 640, and the housing ratio is between 29 and 32, but the total debt ratio is under 41 – OR the Housing ratio is below 29% and the total debt ratio is between 41 and 45%, then we can request a USDA Home Loan Debt Ratio Waiver from the USDA Underwriters as long as we meet TWO of the following compensating factors:
- Payment Shock: The home buyers new housing payment (PITI and HOA) must be at least what the home buyer has been paying for the last year, or less than what they’ve been paying. We will be required to obtain a written verification of rent, and that all payments have been made on time. Living in a unit owned by a family member will not count as meeting this USDA Home Loan Debt Ratio waiver compensating factor.
- Savings on Hand After Closing: The home buyers can get a USDA Home Loan debt ratio waiver if they can prove that they’ve accumulated savings. It does not appear that a gift will be sufficient to meet this requirement, because we must provide 2 consecutive months of bank statements to document the savings. The savings account must be equal to or more than three months of PITI. So, if the total house payment is $1502, we will need savings of $4506 on bank statements that are dated within 45 days of loan application.
- Stable Employment: The home buyers can request a USDA Home Loan debt ratio waiver if they can provide us with evidence of 24 months Employment at the same employer over consecutive months.
- Additional Household Income: If there’s additional household compensation not included in the qualifying income, such as part-time job income with less than a two-year job history, we may be able to use that as a consideration for a USDA Home Loan Debt Ratio Waiver.
- A college degree, or Job training that provides some potential for increased earnings MIGHT also be used as a compensating factor – in North Carolina, this has always been one of the USDA compensating factors for a debt ratio waiver that helps first time home buyers. However with the latest changes, it’s difficult to tell just yet if this still carries the same weight with USDA Home Loan Underwriters.
- Conservative use of credit: Evidenced by a very low Total Debt Ratio, and higher credit scores.
Unlike FHA and VA – USDA RD Underwriters actually look at every single USDA home loan file. So the loan is being underwritten more than one time. First, by the Automated Underwriting system (GUS), then by the Underwriters at our Bank, and THEN by the Underwriters at USDA… if you are receiving a Mortgage Tax Credit from NCHFA, then you have yet another underwriter looking for at the loan!
The GOOD news about Mortgage Tax Credit / MCC program is that it generally allows you to qualify to buy a slightly larger home. It can give you up to $2000 a year in one to one credits, and is a real benefit to hundreds of our buyers each year!
Basic Applicant Eligibility For USDA Home Loan
- Have the ability to personally occupy the dwelling
- Be a citizen of the United States or be admitted for permanent residency
- Non-occupant co-borrowers are not permitted
- Generally, borrowers must sell their existing home – although, if it is a Company Directed Relocation, and you can not logically commute, you may be able to keep the existing home.
USDA RD Mortgage Guidelines state that the:
“Applicants must have adequate and dependable income, typically with a history of 24 months.”
We have certainly made loans to students who just graduated with a degree, and found employment within their field of study. USDA Underwriters generally want to see the First Pay stub prior to closing, so a Letter of Offer can get the loan approved… but you will usually need to receive your first pay check before the loan can close.
Contract Employees must generally have 2 full years of employment within the same line of work to be eligible for a USDA Home Loan in NC.
Income to be verified with a written VOE and one month’s current pay stubs, OR one month’s pay stubs and two years of W2’s.
- Debts with more than 6 monthly payments remaining must be included in qualifying ratios
- Student loan payments must be included in ratios even if loans are currently in deferment
- Self employed borrowers require two year history with 1040’s, and a current P&L
- Disability and Social Security benefits – 3 year continuance documented with award letter or 2 months bank statements, grossed up 125%
- Salary increases within 60 days of the first payment due date are acceptable
- Part time employment must have a history of no less than 12 months
- Alimony and child support income must continue for 3 years and have no less than a 12 month history
- Any income of a non-purchasing spouse, or a member of the household over the age of 18, must be verified to make sure income limits are not exceeded
You can also use the NC Affordable Housing / First Time Home Buyer program with a USDA Home Loan. The income cap on that program is $87,500 across NC.
Have questions about USDA Home Loan Guideline Changes 2016, eave us a comment below, I try and answer these very quickly! Better yet, call Steve and Eleanor Thorne 919 649 5058 – we’d love to give you a quote for today’s best mortgage rates! Steve and Eleanor Thorne 919 649 5058 Connect with us on Facebook!