Last week's tips contained some information about new areas of availability for USDA financing and this brought a flurry of questions with regards to what a USDA loan was since it typically was just for areas that were referred to as “rural areas”. Realtors are now finding out that Rural Areas may be in their back yards!
Third party financing contract addendum now addresses the USDA financing—so no more guessing on what financing lines to use!
Borrowers on USDA loans must be able to prove they have the adequate financial resources to repay the loan and have a reasonable credit history. In my experience, in order to obtain an automated approval through the USDA system, named “GUS” you must have a 640 score. We will do a manual USDA loan underwrite with scores at 620 or higher—this is a new feature just added by Gateway and gives us a tremendous advantage for some borrowers. The manual underwriting guidelines are much stricter than the automated guidelines, but will allow some loans to close that may not have had the opportunity before.
USDA loans have income eligibility—115 percent of the median income for their area, and the house being financed must be located in a qualified area.
Unlike other mortgage loans, the USDA program does not require the borrower to make a down payment—and closing costs can be rolled into the loan (assuming there is sufficient value in the appraisal). Sellers may also pay all required closing costs—there is no limitation on the amount they may pay.
USDA loans have a upfront Guarantee Fee of 2% that can be financed. There is an annual fee of .40%. This fee is being raised to .50% in October. Interest rates are comparable to FHA—very affordable.
As with any government financed program, there are a few nuances. Out buildings: while outbuildings are allowed, if there are too many, the value of them may begin to devalue the overall appraised value of the property. USDA does not want to finance outbuildings. The same applies to swimming pools. The value of the pool will be subtracted from the appraised value. Flood zone: USDA does allow properties in a flood zone, but if the property sits below the base flood elevation, the property must be accepted by the city code to be rebuilt—this one is difficult to overcome. Also, USDA does allow ownership of more than one property, but only if it is due to family needs an size. You cannot purchase one in the same area because you want to rent out your current one—it must be because you have outgrown it and it is needed.
The appraisal that is done is comparable to FHA. The appraisal is chosen from the FHA fee panel and the appraiser is required to make a statement that the property meets FHA minimum property standards.
Once a USDA loan has been approved by your favorite loan Gateway TLC Team, we submit the file to the USDA office for final review. This process can take anywhere from three days to two weeks. Once received back, we are ready to close!
The link is below—scroll around—check some of your listings—who knows—you may have another choice for your borrowers!
I have been closing USDA loans for over ten years now, and look forward to the opportunity to assisting you with them in the future. Please reach out for any information you may need—income eligibility notices, guidelines, etc. We are here to help.
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