What if there is a home loan available that could help low to middle income America buy a home with no down payment? Plus, what if it includes closing costs and an affordable mortgage payment? With the right strategy, we are talking a potential purchase with no cash to close and maybe a refund of the earnest money deposit. How about we throw in additional strategies like delaying the first payment until almost 2 months after closing? Forget what has been said about 20% down payment requirements. A USDA home loan offers first time home buyers and even repeat buyers, one of the most valuable, yet underutilized home buying opportunities. That’s right, USDA Rural Development Guaranteed Loans. Maybe you heard of it? Probably not like we explain here.
USDA Income Limits
In order to use and benefit from a USDA loan, the buyer’s household income must fit within USDA’s requirements. It has a “household” income limit which is both moderate as well as flexible in certain cases. Regretfully, one of the biggest misconceptions is that families must fit within the lowest U.S. income levels. So, many buyers skip right past considering USDA loans. Do not make this huge mistake! Actually, USDA is a valuable resource to middle income America too. Plus, there is no minimum income level as long as borrowers meet USDA debt to income ratio requirements.
First of all, make sure to get the concept of household income. This means adding income for everyone that will occupy the home. Sometimes this limit restricts certain families. For instance, blended families which include multiple generations under one roof may struggle to qualify. Although many USDA income limits exceed $100,000, a buyer with a working spouse and parents in one household could easily surpass the income ceiling, but as a buyer, never disqualify yourself. Always seek the advice of a USDA loan expert first.
USDA Household Income Limits
USDA guaranteed loans divide the household income limits into two distinct groups. Households including 1 – 4 members and 5 or more people. Keep in mind, the household does not mean family. Even an occupying friend’s income within the house is counted. In addition to the income groups, each U.S. county has an income limit.
2018 – 2019 USDA Income Limits
- 1 – 4 household members income limit is $82,700
- 5+ household members income limit is $109,150
However, not all counties are the same. These are the minimum county limits. Those who live in high cost counties may have higher limits. Examples include Charleston SC ($85,700 & $113,100), Austin TX ($98,900 & $130,550), Charlottesville VA ($98,100) & $129,500), Monroe County FL ($112,700 & $148,750), and Raleigh NC ($96,950 & $127,950).
Tips to Exceed USDA Income Limits
Even though a majority of U.S. households fit within the USDA requirements, a good number fall just outside their applicable limit. Do not fret yet! USDA offers income exceptions that could help solve that issue. The following characteristics help increase a household’s chances of using a USDA no money down purchase loan.
- Children under 18
- Documented child care expenses
- Full-time college students 18 or older
- Disability expenses incurred
- Medical expenses for elderly or disabled
USDA Eligibility Map
Household income limits are the first major USDA requirement. Next, is that the property must lie within a USDA eligible area. There is a USDA eligibility map which shows all eligible and ineligible areas in the U.S. Even though many think of USDA only being for very rural properties, most of the U.S. is eligible. Basically, most areas other than the most densely populated areas are eligible. Very often the USDA eligibility map shows whole counties approved for the no money down product.
By viewing the USDA eligibility map below, it is easy to see how many properties would allow a USDA loan. Note that the orange shaded areas show the ineligible areas and they are only in the large cities. Although, even in the large cities buyers looking for this affordable product may find pockets which allow USDA loans. In addition, just a short drive outside the city limits usually gets a buyer back in the no money down zone.
FHA vs USDA Home Loan Benefits
Many think of FHA loans as the loan that provides flexibility to home buyers and it does, but USDA is just about as flexible plus it has no down payment and the monthly payment can be lower. USDA benefits include:
- No down payment
- Seller paid costs to 6% of the sales price
- Use higher appraised value to increase loan amount to cover closing costs **
- 620 minimum credit score allowed
- Manual underwriting allowed
- Much cheaper PMI than FHA
- Lowest government loan funding fee
- 30 year fixed rate term
- Debt to income ratio as high as 45% or more
** If the appraised value is higher than the purchase price, a USDA home loan amount may be increased up to the value to finance closing costs.
The USDA home loan program is the better choice over FHA assuming a buyer qualifies for both. No money down with a fixed interest rate, cheaper PMI and funding fee, flexible credit guidelines. Learn how flexible guidelines are by reading, “USDA loan credit requirements make it easier to buy a home.” It is even possible to use no money down USDA home loans after a previous short sale or foreclosure.
First Time Home Buyers Love Using a USDA Home Loan
With home prices rising over recent years, many first-time home buyers struggle to find the combination of an affordable price and mortgage. Entry level prices in many markets make it difficult for first time home buyers to purchase a home. Common first-time buyer hurdles include:
- Lack of down payment
- Student loan debt
- Limited credit history
- Lack of knowledge
As we mentioned earlier, a USDA home loan solves the down payment issue. Simply put, there is no down payment required. Furthermore, the seller paid closing costs usually covers all buyer closing costs. Also, it was stated above that the USDA home loan has a very low monthly mortgage insurance premium. That is the feature which makes a USDA payment very low compared to other loan options.
In addition to first-time buyer benefits, USDA is very lenient when it comes to credit history. Credit scores as low as 620 are accepted and only a few credit references are needed make a huge difference. This is especially true for younger buyers who have only had a couple years or so of credit experience. Finally, many buyers have large student loan debts these days. A majority are young buyers, but it includes middle age or even retired borrowers who have gone back to school or cosigned student loan debt. USDA loans may still be an option as long as the buyer fits within the debt ratio guidelines. If not, then we will check other student loan friendly options.
First Time Home Buyer Process
- You have learned some basics in this article
- Contact us to get the process started
- Discuss buyer goals
- Complete loan application and pull credit
- Discuss borrower and loan scenario
- Prequalification provided
- Buyer provides documentation for solid pre-approval
- Home shopping begins
A first time home buyer can shop confidently and accurately by following the steps above. What does that mean? It means not putting the cart before the horse. Why look at houses or even put in an offer first? There is a much better success rate when a buyer follows this process and follows a plan. A solid plan allows a buyer to compete with other buyers and obtain a mortgage plus a house that fits the buyer’s needs.
Repeat Buyers Can Take Advantage of a USDA Home Loan
Another misconception of USDA home loans is that they are only for first-time home buyers. In reality, USDA loans are for any qualifying first-time or repeat buyer. Repeat buyers come in many forms and have a variety of scenarios which benefit from a no money down purchase. Here are some examples of repeat buyers who should consider USDA.
- Straight from selling current home netting minimal funds to buying another
- Relocated to a new area, rented first, and then purchased
- Had prior credit issues, took time to re-establish credit, and then buy
- Buying a full-time retirement home
- Selling current home which nets profit and buying another primary residence
USDA Conventional 20% Down Test
All of the above could benefit greatly from a USDA loan. Although, USDA requirements do limit a buyer who qualifies for what they define as a conventional buyer. A buyer with non-retirement assets equal to 20%+ down payment, closing costs, and would meet standard 28% housing debt ratio and 36% total ratio, is not eligible for USDA financing. So, if a buyer sells their current house where the proceeds and their non-retirement assets (checking, savings, money market accounts) total this level, USDA will not approve the loan. Basically, USDA figures a buyer that has this level of assets does not need the no down payment loan.
Out of the group above, the example that least considers a USDA home loan is the last one. A seller who nets decent proceeds from their sell usually thinks using the funds for down payment is the best and possibly only option. Not always true as shown below.
What Should I Do With My Sales Proceeds?
Selling a home and walking away with cash in hand is a great feeling. Many only consider those funds immediately as down payment for the next home. While this may be the conventional way of using sales proceeds, it is key to consider alternative strategies. In these examples, we will exclude sellers who meet the conventional test described above. But, buyers that netted a few thousand up to less than 20% of the new home price have options to consider.
- Pay off credit card debt
- Satisfy consumer loans (high interest rate)
- Pay off student loans
- Fund college
- Start an emergency fund
- Use funds for remodeling new home
All of the above are viable strategies for a repeat buyer and the right answer varies for each person, but think about this. If a buyer qualifies for a no money down USDA home loan with some of the lowest fees and most affordable payments, why not use profits for the above? Typically, mortgage loans have lower interest rates than consumer debt. So, paying off debt makes a lot of sense. Get a fresh start before buying, plus it usually helps a buyer better qualify.
College is very expensive and student loans are burdensome on the budget, so getting rid of them is a consideration. Additionally, many homeowners are one paycheck away from not being able to pay bills. That’s why paying off debt to increase cash flow or funding an emergency savings account are key options.
Transition from Seller to Buyer Successfully
These and other scenarios show strong reasons to consider USDA guaranteed home loans as part of a sell and buy strategy, but remember that a seller should consult with an expert advisor before using the proceeds. This is especially true when buying another home. Many buyers find out too late that they should have used the funds differently. For instance, paying off one debt instead of another and then finding out it hurts a new mortgage qualification. Paying off a credit card to raise a score may be important for one buyer, yet paying off a high payment loan is better for another. That’s why an early strategy discussion is key for the best results in a transition from seller to a successful buyer.
Another tidbit of information. Buyers, who close both a sale and purchase on the same day want to know, “When do I get the keys?” Their buyers need to get into the house and so understanding when both buyers get access to the homes are key. Check out the article, “I have signed my closing papers, so when do I get my keys.”