USDA Home Loan PMI Updates

Beginning October 1 of 2016 home buyers in NC will benefit from lower monthly USDA Home Loan PMI Fees.  The United States Department of Agriculture (USDA) announced last month that they will lower the upfront and monthly fees for its home loan program this fall. The “industry” term for these fees is Guarantee Fees, however, most of us refer to them as USDA Home Loan PMI fees, as they cover the mortgage insurance charged by USDA to use the program.

USDA Home Loan Benefits

This mortgage type is extremely popular with first-time home buyers in NC since USDA Loans require zero down payment. And the Rural Development (RD) loan program, as it is also known, is a favorite because it comes with cheaper monthly mortgage insurance fees than do FHA loans… and those USDA Home Loan PMI fees are now going even lower!

As the USDA Loan PMI fees drop even further by Halloween, many believe the USDA Home Loan NC will become one of the most affordable home loans available, second only to the veteran-exclusive VA home loan.  And of course this will entice renters in NC – since a USDA home loan can make owning a home in Charlotte and Raleigh less expensive than renting one.

As the housing market recovers, the USDA Loan NC program costs less to operate and sustain. The savings are passed on to USDA Home Loan borrowers, who also benefit from Government backed (substantially lower) mortgage interest rates!

For those of you who don’t know, the purpose of the USDA Loan mortgage in NC is to promote home ownership in rural areas.   In NC, every county has some portion of it that qualifies for USDA Home Loan financing – because in NC, we can get “rural” pretty quickly! 

Many suburban neighborhoods are eligible for USDA Loan financing. Buyers often use this program just outside of major metropolitan areas. The loan offers 100 percent financing, meaning no down payment is required.

USDA Home Loan PMI Fees

Similar to FHA loans, USDA Home Loans NC require two types of fees: an upfront PMI fee and a monthly PMI fee.  The US Department of Agriculture doesn’t actually make loans.  They insure these mortgage loans, which is why they have such low mortgage interest rates – and we are required to follow the USDA Home Loan Guidelines for approval.

The current upfront USDA Home Loan PMI Fee (guarantee fee) is 2.75 percent of the loan amount, and an additional “annual fee” that is currently 0.50 percent.  The USDA Home Loan PMI annual fee is collected monthly, as it is paid in twelve equal installments and included in each mortgage payment.

As mentioned above, however, we learned in mid-May the upfront USDA Home Loan PMI fee will be reduced from 2.75% to 1.0%. And the monthly fee will also drop from .5% to .35%.  The upfront fee is typically added to the loan balance so that home buyers do not have to pay it in cash… and the monthly fee rate is dropping to 0.35 percent annually, or about $30 per $100,000 in loan balance.

The new fees apply to USDA Loan NC applications for which USDA issues a “Conditional Commitment” on or after October 1, 2016. A USDA-issued commitment happens near the end of the home buying process and most home purchases take between 30 and 90 days to complete.

USDA Home Loan PMI Fees do not “age” off the loan.  Meaning – you will not get a portion of the upfront fee refunded if you move 14 months later.  If you live in the property for 17 years, and you’ve built up tons of equity in the home, USDA PMI will still be charged each year.

Here’s the good part about that – the annual USDA PMI Rate will be charged on the Balance at the beginning of that new year.  So each year, as you pay your mortgage balance down, the amount of USDA PMI charged will be charged on that lower balance, and will be less from year to year (I’m hoping this makes sense – if not call me and I’ll run an amortization for you to see).

USDA Loan NC Qualifying Guidelines

• Property must be within the USDA Home Loan “Footprint” for rural properties.
• You need two credit scores over 620.  Straight USDA Home Loan underwriting guidelines indicate that applicants with credit scores down to 580 are eligible.  It will just depend on all of the other factors that play into your qualification picture.  Generally we see loan approvals beginning with folks that have at least 2 scores over 600.  Those cases are usually approved when you have money left over after closing, or if you are not going to have payment shock.  If you have MULTIPLE layers of risk, the NEW USDA Loan approval model is looking for a credit score of 680!
• Income restrictions due apply and in NC the cap on many families with 1 to 4 in the family is $75,650.  The USDA Loan Income Limit in most of our state for a family of five or more is $99,850.  The income limits do vary by County in NC, so be certain you are looking at the correct numbers for your area if you are close to the limits.
• Any Foreclosure, Deed In Lieu, or Short Sales need to be at least 36 months behind you.
• Student Loans, even those in deferment will be counted against you.
• The Maximum total debt ratio “guideline” is 42%.  We’ve seen files REJECTED that had 660 credit scores and a 44% debt to income ratio.  Ratios and Credit scores need to be IN-LINE for USDA Home Loan approvals right now.
• USDA Home Loans are for Owner Occupied Properties, not Commercial Farms, 30 year fixed rate mortgages.

Mortgage loans going through the USDA Home Loan Program are approved by the Automated Systems.  After that initial approval, the loan is seen by a Bank Underwriter, THEN sent to the USDA for approval.  Because of this process, it often takes a few more days to get approved for a USDA Home Loan in NC.

USDA Home Loans are part of the Federal Budget process, and as such the maximum income limits and USDA PMI Rates are subject to change every October.  It’s normally announced in September if there will be a USDA PMI Rate change… this year they leaked the news early!

If you have more questions about the USDA Home Loan PMI fees, and how this change could help you buy a slightly bigger home please call Steve and Eleanor Thorne 919 649 5058.  We do tons of USDA Home Loans in NC and we want to help you buy a house!