Today I want to talk about one of the most popular loans in Indiana-the USDA Rural Development Loan. Sounds like you are buying a side of beef, doesn't it? In actuality this is a loan that is administered and funded by the United States Department of Agriculture. The purpose of the loan is to enhance residential development in rural areas. First things first, let's talk about the criteria for the loan as not everyone qualifies.
Income Limitations: This loan is for individuals or families of modest means, so there are income caps.
For a family of 4, the income cap is $74,740, for families of 5 or more the allotted income can not exceed $98,650. The income caps cover the total household income whether or not all income earners are on the loan. There is no limit for loan amount other than the normal debt ratios that are required for underwriting the loan.
Geographic Location: Rural Development loans are for areas in which the population density is lower than a typical city situation. If I am given an address I can check to be sure that the property in question is eligible for the loan. Sometimes an eligible property is located across the street from a property that is ineligible.
Credit: A minimum credit score of 640 is recommended.
This is not a loan for farms or farmettes. I know, the name would suggest that it is a loan with agriculture in mind-but it works best for single family homes in small towns or rural areas that do not have farm buildings or farm acreage. You can obtain up to five acres with your home, but the land must be judged to be non agricultural in nature-i.e., it can't be used as income producing. That would include tillable land, barns that could be used to store farm machinery or to house livestock. And the barns can't be worth more than 8% of the total sale price of the property. To this end, we have had situations in which sellers have had to disassemble horse stalls, take down fencing, and modify barn doors so machinery would not fit. In other words-this is really not a loan for that farmstead that one has always dreamed of. In addition, this loan does not like the suggestion that income may be produced from the improvements on the property at all-so no workshops either. The purpose of the loan is for residential living.
As I mentioned before, this is a loan for folks of modest means-so no luxury items such as swimming pools or hot tubs. And the borrower must be in a position in which they can not qualify for conventional financing. So while having a little in a savings account is good-having a large amount of money that can be used for down payment purposes is not good. If the borrower can qualify for a conventional loan USDA will decline the loan.
So-setting all those exceptions aside-this is a great loan. It is a thirty year fixed rate loan, but it does have a 2% funding fee that rolls into the loan, similar to the way VA works. There is also a small amount of mortgage insurance that remains on the loan (much like FHA) for the life of the loan. This money is to protect the program against defaults. It is underwritten to HUD rules, so the same condition features that are required for FHA are required for this loan, such as five years life on the roof, 100 AMP electrical service, no peeling paint on the home if it was built prior to 1978, no termites etc.
As far as costs to the consumer go, normally USDA buyers as a part of their negotiations, request closing costs to be paid by the seller. Barring that the closing costs are similar to any loan. Typically $2500 to $3000 depending on the price of the home. If the property appraises for more than the sales price the closing costs up to the amount of the appraised value can be rolled into the loan-but since no one can count on an appraisal amount it is best to have arrangements for the closing costs made prior to the appraisal.
The inspections that are required are the same as all government loans: termite, and well and septic if applicable.
In Indiana this is a very popular loan. In fact, the only downside of the loan is the time it takes to process it. The loan is submitted to the lender for approval which normally takes about three weeks. During this period the home will be appraised, the borrower will be credit approved, and the title will be examined. Once those things are acceptable to the lender underwriting the loan, it is sent to the USDA state office for review. This is where things slow down. During the winter months, one can expect that USDA will sign off on the loan within about four or five days. However, once the spring months roll around it can take anywhere from twenty to fifty business days to process the file. This is due to recent cutbacks in the federal government and the increased popularity of this loan product. So what I would say is if you have the ability to obtain the 3.5% for an FHA loan and want a quick closing-take that route. However, if you are patient and can find a seller to work within the time frame, this may be the loan that works best for you. If you are prepared to wait up to 90 days to close during the busy spring and summer months when the housing market is in full swing, it will be worth the wait.
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