Hey, Kyle here with winthehouseyoulove.com.
Today, we're talking about USDA loan requirements.
USDA loans are kind of strange loans, but they are like a hidden 0% down
program that a lot of people don't realize that they can qualify for.
So USDA loans are one of the bigger loan programs in one of the main
categories of different loans.
We have conventional loans, FHA loans, VA loans, USDA loans.
Those are the main four categories of loans.
And a lot of people look over USDA loans.
So we're going to cover all of the ins and outs of qualifying for them.
USDA loans are kind of weird.
They offer a lot of benefits.
They have some weird quirks, but sometimes you have to have this weird
box that you fit in with USDA loans.
So it's good to know what it's like to get that 0% down and to get a great rate.
One of the benefits of USDA loans are probably two main benefits that people
enjoy about USDA loans is #1 it's 0% down.
It's one of the only 0% down programs that's available to non-veterans
and USDA rates are fantastic.
Since USDA is insured by the government, like FHA loans and like VA loans,
you get really great rates on USDA loans compared to a conventional loan.
So in a nutshell, this is what USDA says their program does.
It says this program assists, approved lenders in providing low and moderate
income households the opportunity to own adequate, modest, decent,
safe, and sanitary dwellings as their primary residence in eligible rural
areas, eligible applicants may build rehabilitate, improve or relocate a
dwelling in an eligible rural area.
The program provides a 90% loan guarantee to approved lenders in order
to reduce the risk of extending 100% loans to eligible rural home buyers.
So in a nutshell, the USDA loan is a great option in rural areas.
So we're going to break this down into some categories, so it's
easy to track along here, but the first requirement let's talk about
property requirements for USDA loans.
Each loan type has their own requirements for what the
property is going to look like.
So with USDA, they want it to be a rural property.
Now you might be thinking instantly, Oh, I don't live in a rural area.
There's actually a lot more properties than you think.
If you stick around to the end, I'm going to show you the USDA map and how you can
navigate that to figure out if you have a USDA eligible area around you, because if
you really need 0% down, You might be able to just extend your commute by five to 10
minutes and be in a USDA eligible area.
That is a chunky pen.
So it has to be in a rural area.
Also USDA wants these properties to be in good condition, they don't like rehab.
You might be able to find a way to do a rehab loan with USDA, but they're
just complicated, they're not a lot of programs out there to do USDA like that.
So you might run into issues there.
I would suggest using something closer to an FHA 203K to do rehab with.
Most of the time, you're going to want to find a property that's
in solid condition, unless you're exclusively using, a rehab loan.
Also the property needs to be a primary residence.
USDA is not going to allow investment properties.
You need to live in the home.
So something big to keep in mind, eventually you could live in it for
a while and then maybe use it as an investment property later, but it needs to
be a primary residence when you purchase.
Something that's very strange about USDA loans is that you would think
with a being USDA and in a rural area, that they would allow you to
have a farm or they would allow the financing of a farm, but they don't.
Does have farm loan programs, but farm loans are separate from USDA loans.
A USDA loan, right, we're talking about a primary residence, USDA loan,
does not allow any income producing buildings or land to be financed.
So if there are outbuildings like there's barns or silos, if those are being used
for commercial income producing purposes, they cannot be financed on that loan,
meaning that you can't finance a property if it has an actively working farm on it.
You can just simply can't do it with a USDA loan.
It's super strange, but if you need to purchase a property and finance it, and it
has a working farm on it, or it has income producing buildings or land, then you need
a farm loan, not a USDA residential loan.
When it comes to income, just like every other loan, you need
stable income and employment.
What that looks like is you need to have a history of employment over the past
two years, school counts as employment.
If you have any time off, what you're going to have to do is write
an explanation to an underwriter.
Normally for USDA, if you have a gap of 30 days of unemployment, that's
where you need to write a letter of explanation and your loan officer
can guide you through what that looks like and how to navigate that.
Normally it's fine.
What they're looking for is they just want to see, are you somebody
who can consistently hold a job?
It just needs to look cohesive in there.
So if you took time off and you were a stay at home mom or stay at home dad,
or you had an idea injury, something happened it's something that you're
going to explain if you have a job gap.
Also stable income, an underwriter doesn't want to see income that's declining.
They want to see income that's stable or increasing.
If you have fluctuating wages, the underwriter's going to have
to take a closer look at your loan to make sure that everything looks
consistent moving forward, that they know that in the future, you'll
be able to pay back that loan.
USDA is interesting in that they have income limits, whereas conventional
loans and FHA loans and VA loans don't have income limits USDA does.
So income limits vary by county, and I'll show you a tool that we use that
you'll be able to quickly figure out if you qualify for a USDA loan, based on the
property and income at the end of this video with two quick and easy, tools.
But there are income limits.
Not everybody qualifies.
It depends on your home size.
Something that you have to keep in mind too, is USDA is not just
interested in the income of the people on the loan, but they're interested
in the income of your household.
So people 18 and older, they want to calculate the income
of everybody in that home.
So for instance, if you buy yourself a make under the USDA income limit and
you're on the loan, but your spouse and you together make more than the income
limit, you will not qualify for that loan, even though your spouse isn't on the loan.
They look at household income for the income limit, not loan
income for the income limit.
So that's a weird quirk that can kind of trip up things.
Or for instance, if you have, if you're living with maybe your parents
are elderly and they live with you, you're going to have to calculate any
income that they receive from pension, retirement, social security, or working.
That's going to have to calculate into the income limit, even
if they're not on the loan.
So some features of the USDA lone, the biggest one, 0% down.
My one word of caution.
I wish that with 0% down programs and down payment assistance programs, there
was a requirement for some form of education or counseling to be involved
with 0% down because 0% down sounds great, but it very easily can be dangerous
depending on what your future plans are.
With 0% down.
I think they could be great programs, but my word of caution would be
0% down can keep you trapped in a property because you don't have equity.
Let's say that the property value is here right now.
And you got a loan for that exact amount, meaning you put 0% down.
Well, if all of a sudden the housing market changes and prices drop, you're now
immediately underwater on your mortgage.
Now, if you're going to be in that property for a while, that's okay.
Because housing prices are going to fluctuate, and while that's going on
your loan balance is decreasing, and you still have values fluctuating.
Eventually you'll have equity in that property, but if you're looking at
moving in a short time frame, you might be trapped in that property.
Or when you sell, you might have to bring money to the closing table.
So something you need to be cautious of and aware of when you do 0% down.
USDA also has really low mortgage insurance, which is awesome.
Since you're putting 0% down, you're going to have mortgage insurance.
You can't remove mortgage insurance, unless you're on a conventional loan.
That's 20% down or an FHA loan that has 10% down.
And even then it takes 11 years to come off.
But mortgage insurance is pretty much going to be seen on any
loan with less than 20% down.
So USDA does 0.35% of the loan balance as their mortgage insurance payment,
compared to FHA loans are 0.85%.
So you can see that drastic difference.
FHA has a mortgage insurance of 0.85%, and USDA has 0.35%.
So you have a lot of savings with USDA loans, as far as mortgage insurance.
USDA also has a funding fee that's wrapped into the loan amount.
So if you have a loan for $200,000, or the property value is $200,000 and you
take out 0% down as a loan, your actual loan amount is going to be $202,000.
$2,000, or 1% of the loan, is added into the loan amount.
That's the funding fee that USDA charges to be able to provide these loans.
And you have of 1% on USDA compared to 1.75% on FHA.
So USDA, as far as government programs go, is one of the better options.
I think if we're ranking government loans, VA loans are the best, but
they're only available to veterans, USDA loans are second best, and
then FHA loans are third best.
The problem is VA loans require you to be a veteran, USDA loans require you to be in
a rural area and the income limits and FHA loans are the most open and accessible.
Another weird quirk with USDA loans is, you have to go through the underwriting
process, like any other loan, but then at the very end, you have to
submit that loan and not you, but your lender will submit that loan to USDA.
And the USDA has to do a final approval, an audit of that loan.
And turn times take anywhere from one day to maybe a week.
And USDA gives you no insight to how long your loan is going to sit
in there or any progress updates.
So what will happen is you'll go through the regular loan
process where you're doing an inspections, appraisal, underwriting,
closing, everything like that.
Once you're finished and you're clear to close that loan
gets submitted to the USDA.
And the USDA then is going to take that loan they're going to audit it and make
sure everything looks good and either give you an approval or a rejection.
So, as long as the lender's doing everything correct,
you're going to get an approval.
I've never had a rejection from USDA, but the thing that's a bummer is USDA can
kind of take however much time they want.
And they're a government program.
It can just take a long time and they do not give you any status updates.
They don't give you any progress updates.
You can't call and check in on a file.
You just have to wait and hope for the best.
That's the only downside of going through that, the USDA process.
One weird quirk of USDA that a lot of people don't know about is you
can wrap closing costs into the appraised value of the property.
So let's run through an example.
Let's say you have a property for $200,000 that you purchase, and
let's say it appraises for $210,000.
Well, you can actually wrap in your closing costs up to the appraised value.
With normal loans, you can't do that.
All right, you have to go buy the lesser of the purchase
price or the appraised value.
With USDA, you can use the appraised value.
So if we have a $200,000 price, okay, let's say that our loan is
$202,000 because of the funding fee.
And we appraised at $210,000, we now have $8,000 leftover.
That we can finance.
So, if you have any closing costs around $8,000 or less, you can
finance that into the loan, right?
Just increase the loan balance to cover any of those closing costs,
which is always a nice benefit, but your property does have to
appraise above the purchase price.
All right, now let's jump over to some quirks with qualifying on USDA loans.
So one thing to note, is anyone who's a qualified buyer can get this loan.
It's not just for first time home buyers, you can get it if you're a first time
home buyer or a seasoned buyer, right.
It can be your second, third, fourth home that you're moving to.
So not just first time home buyers, sometimes USDA requires reserves and
reserves are basically the lender, making sure that after you close on the loan,
your bank account, isn't wiped out.
They want to make sure that you still have money left over
after you close on a property.
So with reserves, it normally looks like one to two months of reserves.
And all that means is if your housing payment is a $1,000 per
month, two months of reserves means that you need to have $2,000 in the
bank after you close on your loan.
So $2,000 left in the bank after your closing costs.
So if you're bringing a $1,000 to closing, you need to have $3,000 at
closing, meaning $1,000 for closing costs and additional $2,000 for reserves.
And reserves are just it's money that's that you have, it
still stays in your account.
You don't pay it to anybody, but again, the lender is just making
sure that when you close on your loan, you still have money left over.
Okay, as far as credit score, a 640 credit score is going to be the best for you.
You're going to get better rates and it's going to be easier
to qualify with a USDA loan.
It does go down to 580 and in some instances you can go down to 550.
You need to have a lot of other compensating factors, meaning that if you
have a 550 score, you probably need to have a lot of assets, you need to have
a good income and debt to income ratio.
If you do have a 550 score, I don't see that happening most of the time.
You can go down to 580, but 640 should be what you're shooting for, if
you're going to qualify for USDA loan.
Also, you're going to need to wait three years after a bankruptcy,
a foreclosure, or a short sale.
So if you had any of those events happen, you need to wait until
those are discharged or finalized and then wait three years before
you can get your USDA loan.
USDA is one of the tightest loans in their debt to income restrictions.
So they have a 29% front end ratio and a 41% backend ratio.
So 29%, I wouldn't focus on that too much.
Your a mortgage advisor can help you with that, but 41%.
We talk about debt to income on a couple of videos in this channel.
What this means is if you take your gross income times 0.41, then that's
the max amount of debt you can have.
So you're going to count debt like auto loans, credit cards, student loans, any
other type of credit you have, plus your estimated housing payment that together
can not exceed 41% of your gross income.
So, this is pretty tight as a restriction.
USDA will actually go all the way up to 46% in some circumstances,
but we're mainly going to need to focus on 41% for most people that's
the debt to income limit is 41%.
And that's pretty low compared to conventional which
will let us go up to 49%.
FHA will allow us to go up to sometimes 56%.
So, USDA loans can sometimes be hard to qualify for to make sure
we hit all these boxes, right?
Because we have income limits and debt to income limits and property limits.
And it's, it gets a little confusing and there is sometimes
this really narrow box that we're trying to get in with USDA loans.
Closing cost credit is 6% of the purchase price as a maximum.
So if you have a $100,000 purchase price, the most you can receive
from the seller as a credit towards your closing costs is $6,000.
Okay, just take the purchase price times 0.06.
That's the max seller credit you can get.
You can get anywhere from 0% to 6% seller credit towards your closing costs.
Okay, finally, let's go ahead and jump over to the screen.
I'm going to run through a map and a calculator.
That's going to help you see what properties are eligible along with if
your income is eligible for USDA loans.
So I have a link down in the description.
That's going to take you to this page, and this is USDA's page that's going
to help us see what properties qualify for USDA and the income eligibility.
So, first we want to make sure we're on this tab, property eligibility.
We're going to go ahead and accept this disclaimer.
Once we're on this page, we can now type in an address up here
to see if it qualifies for USDA, or we can search in this map by
zooming into different locations.
So we're in Dayton, Ohio.
So what I'm going to do, it's probably not going to search Dayton.
We're unable, probably need to put in an exact address.
I'll put in our office location.
So what it's going to show me is this area, this address is not located
in an eligible area, and I can take this map and I can zoom out.
And what I see here is all of this area around here in orange is ineligible.
We can see that down here.
So it's a nice about USDA air, uh, areas.
Is that, for instance, if this was my, you know, this is where I currently
work, so I could live in one of these cities and not qualify for USDA, but if
I extended my commute to just outside of this area, all of a sudden I could
purchase over here or I could purchase anywhere over here, I could extend my
commute and now qualify with a USDA loan.
Or what often happens for people in our area is maybe they work here in Troy.
Well, we can see all of this Troy area, doesn't it, but they could good move
to tip or caste town or pleasant Hill.
They could live in Ludlow falls or West mountain, any of these surrounding
areas and qualify for USDA, extend their commute and then work in Troy.
Now we can jump over to income eligibility.
What we'll do is we'll first pick a state.
This is going to help us see the maximum income limit with USDA.
So I can choose a County.
I'm just going to pick Adams County.
I'm gonna have to choose my number of people in the household.
And USDA wants to know this to see because the income limit increases with
how many people are in your household.
So let's say I had, it was.
Me and three other people.
So I'm going to put four people in my household that I need to put number of
residents under 18 years old, disabled or full time students let's put two.
As loan applicant, or co-applicant age 62 or older, I'll put no.
And any disabled persons living in the household will put no as well.
Then we can hit next USD.
Doesn't want to look at childcare expenses.
So maybe I don't have any childcare expenses.
And then they want to know monthly income.
So let's say base employment income is 5,000.
And let's say for the other household member, let's say 5,000 as well.
I'll go ahead and finish.
And now I can see applicant is ineligible.
Alright, so we can take a look and see why are we ineligible?
Well, annual household income is $120,000.
But our total, uh, Here we go.
This is for childcare expenses.
Adjusted income is a one 19.
So we can see that childcare expenses are reduced, um, from that limit.
So if you have childcare expenses that does help you qualify it.
Um, but I can see, see that the limit, yeah, here was actually 86,008 50.
So in this instance, we would make too much money to qualify for the USDA
income limit here on their program.
Hey, thanks so much for watching this video.
If you want to learn more about different loan types, if you click
over here, I'm going to show you an FHA loan, all the ins and outs of it.
So you can compare USDA versus FHA.
What's a better option for you.
And if you don't qualify, USDA, maybe FHA is a good option.
So click over here to check out FHA loan requirements.