Homes that are located in rural or semi-rural areas can be more difficult to find financing for when researching conventional loans. Homes in these areas by nature are somewhat isolated as well as remote. This is important as it relates to identifying comparable sales in the area. When lenders evaluate a loan application there are actually two separate approvals going on- one for the applicant and one for the property. The applicant will provide income and employment documentation as well as copies of bank statements and more. A credit report will be pulled and reviewed.
As it relates to the property, the lender wants to make sure the property is marketable. This simply means how long would it take to sell the home and how are other homes in the area selling? This is primarily answered with the completion of a property appraisal. The appraisal compares the subject property, the property under contract, with similar homes in the area. Appraisal guidelines then ask the comparable sales be relatively near the subject property, at least three of them, typically less than one mile away and have sold within the previous three to six months. But there’s the problem with a conventional loan- it’s highly unlikely such comparable sales can be documented. But that’s where the USDA loan comes into play.
The United States Department of Agriculture oversees the USDA home loan program. First introduced back in 1935, it was an inducement by the federal government to help people buy homes with as little cash to close as possible while at the same time moving people and homes into sparsely populated areas. As long as the applicants used the USDA program to live in the home as a primary residence, it was a welcomed program.
Today, the zero-down USDA loan is still used to finance homes in rural areas and the rates and terms are extremely competitive. Buyers can get the loan directly from the USDA but it’s much easier to work with a lender experienced with this program. If you take a quick look at the timeline between working directly with an experienced mortgage loan officer with applying with the USDA and all the bureaucratic baggage that would carry, the local loan officer is the preferred choice.
The USDA loan also carries a guarantee to the lender should the loan ever go into default. Should a home go into foreclosure, the lender is compensated for the loss. Just like other loan programs that carry a guarantee to the lender, the guarantee is financed with a form of mortgage insurance. And in the case with a USDA loan, two such policies are attached to the loan. The upfront policy, called the guarantee fee, is 1.00% of the loan amount but does not have to be paid for out-of-pocket but instead is rolled into the final loan amount. There is also an annual premium that is paid for in monthly installments along with the principal and interest amount, property tax and homeowner’s insurance.
There are a few restrictions that come with the program, one of which is making sure the home being financed is located in an approved area. These areas are identified via the U.S. Census Bureau when the Census is taken. What’s interesting about this is areas that look nothing like “rural” but more suburban in mind it still may be an approved area by the Census Bureau. If an area increases in population since the last Census was taken, buyers can still take advantage of this zero-down loan. That is, until the next Census comes around.
When someone sees a potential purchase, the first thing to do contact the loan officer and provide the property address. The loan officer can then look up the address to make sure it’s eligible. Second, there is also a limit on household income. All occupants 18 years of age and older must report gross monthly income. The lender will then make sure this income does not exceed 115 percent of the median income for the area.
One final mention- the USDA loan comes in one flavor and one flavor only, the 30 year fixed rate loan. There are no other loan term options but at the same time there is no prepayment penalty so borrowers can pay any amount they wish beyond the required 30 year monthly payment.