USDA Loan Requirements (2020) For 0% Down!

USDA Loan Requirements (2020) For 0% Down!

Hey, Kyle here with 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. Right? 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. Okay. 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. Okay. So, wow. That is a chunky pen. Okay. So it has to be in a rural area. Also USDA wants these properties to be
in good condition, they don't like rehab.

Okay. 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. Okay. Also the property needs
to be a primary residence. USDA is not going to allow
investment properties. You need to live in the home. Okay. 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.

Okay. Does have farm loan programs, but farm
loans are separate from USDA loans. Okay. 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. All right. 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.

Okay. 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. All right. 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.

Okay. 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. All right. 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.

Right? 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. Okay. USDA also has really low mortgage
insurance, which is awesome. Right? 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. Okay. 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. Okay. 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. Okay. 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. Okay. 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. Oops. 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. All right. 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. Right. 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. Okay. So $2,000 left in the bank
after your closing costs. Okay. 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%. Okay. 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. Okay. 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. All right. 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. Okay. So we're in Dayton, Ohio. So what I'm going to do, it's
probably not going to search Dayton. Let's see. 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. Okay. 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. Okay. 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. All right. 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.

Okay. 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. Okay. 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. Okay. But our total, uh, Here we go. Yeah. Deductions. 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.

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