As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Are you looking to buy a home but don’t have the money saved for a down payment? If you live in a qualifying rural area, you may be able to take advantage of a USDA loan, now offered by Quicken Loans.
We’re very excited to be able to offer this option to our clients. Along with the VA loan, the USDA loan is one of the few loans available allowing home buyers to purchase without the need for a down payment.
The USDA loan program has some other desirable features we can’t wait to tell you about. As with any loan program, there are also some requirements to qualify. Before we get there, let’s start with the basics.
What Is a USDA Loan?
A USDA loan (also known as a Rural Development loan) is a loan that’s backed or directly guaranteed by the U.S. Department of Agriculture (USDA) for people in rural areas with the goal of providing an affordable option for housing in these communities.
The USDA loans offered by Quicken Loans are made available through the Guaranteed Rural Housing Program (section 502). That means that eligible loans are made by Quicken Loans and backed or guaranteed by the U.S. Department of Agriculture.
What Are the Features of a USDA Loan?
The USDA loan program has a couple of unique features that make it one of the most competitive loan options available on the market for those looking to get a house. Here are a couple of the big ones.
The biggest feature of this program may well be the fact that it doesn’t require a down payment. This could make the program particularly attractive for those looking to get into their first home with little to no funding for a down payment, although there’s no requirement that you be a first-time home buyer.
It’s available as a purchase loan for primary properties. In addition, you can do a rate/term refinance from another USDA loan on up to 100% of your existing loan balance. Cash-out transactions aren’t available on USDA loans.
Low Guarantee Fees
Loans that don’t require high down payments all have some sort of insurance tied to them in order to give mortgage investors a little bit of extra protection in exchange for a low or no down payment.
The USDA version of this is called a guarantee fee. It functions similarly to FHA mortgage insurance, but the key difference is that the fees are a lot lower. How much lower? Let’s do a quick comparison.
The following example assumes that you’ve made no down payment on a USDA loan and the minimum 3.5% down payment on an FHA loan for a $200,000 loan amount.
On an FHA loan, you would pay 1.75% of your loan amount in upfront mortgage insurance premiums. That’s $3,500, either paid at the closing table or financed into the loan. The annual premiums come out to 0.85% per year, which breaks down to $141.67 per month.
Let’s compare that to the USDA loan option. The upfront guarantee fee for USDA is 1%. If we apply that to our $200,000 loan amount, it’s $2,000 in upfront fees, or it can be financed into the loan amount just like with the FHA option. The annual guarantee fee is only 0.35%, which is $58.33 on a monthly basis.
Requirements for a USDA Mortgage
These benefits make the USDA mortgage a great option for qualified clients. Now that we’ve talked up the benefits, what do you actually need to know to qualify? Qualification for this program is based both on the area in which you’re looking to buy and your financial profile.
In order to qualify for this program, your property has to be inside one of the designated areas. If you’ll be living in a metropolitan area, this loan program isn’t for you. However, if you live in a rural area or even on the outskirts of suburbia, you may find that this is an option worth looking into.
The USDA does have a map you can use to check eligibility in your area. When you look at the map, any address outside of an orange area is eligible for the program. I’ve included a sample screenshot below.
There can’t be a working farm on the property, and you can only purchase a single-unit primary residence.
In order to qualify for a loan under the USDA, the total income of all the adults in your household can’t exceed 115% of the area median income. It’s important to emphasize that this includes all the adult members of your household, not just mortgage applicants themselves. Let’s go through an example so you know what to expect.
Let’s say I made $40,000 per year and my wife made $30,000. If our son earned $10,000 per year as a waiter while working his way through college, our total qualifying income would be $80,000.
If your household has more than four members (adults plus minors), you may be able to qualify for this program with slightly higher income. In addition, if anyone is a full-time student in your household, there’s a limit to how much of their income is counted for qualification purposes.
In order to see if you’re eligible, you can run your numbers through the USDA’s income eligibility page. When you check your eligibility, certain expenses like child care can be deducted as well.
There are a couple of requirements that need to be called out in terms of your credit history in order to qualify for a USDA loan. The following are the guidelines for getting a USDA loan through Quicken Loans. Other lenders may have different requirements.
- You need a minimum FICO Score of 620 in order to qualify.
- For the best chance of qualifying, your debt-to-income ratio (DTI) – a comparison of your monthly debt payments against your overall monthly income – can’t exceed 50%. For the best chance of approval, keep your DTI at 45% or less.
Let’s do a quick sample DTI calculation so you know where you stand.
Let’s say you make $48,000 per year. That gives you a monthly income of $4,000. Let’s say you spend $1,000 per month on rent. You have a $400 student loan payment and a $250 monthly car payment. Your minimum credit card payment is around $50 per month. Your total DTI is 42.5% ($1,700/$4,000).
If the USDA loan option sounds right for you, you can get started online. If you’re more comfortable speaking with one of our Home Loan Experts, they’d be happy to take your call at (800) 785-4788. If you still have questions, leave them for us in the comments below.
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