Are you a home-buyer looking for 100% mortgage loan financing options? Currently there are only two loan types available that offer no down payment options for buyers seeking a home mortgage loan. Veterans Administration (VA) loans and United States Department of Agriculture (USDA) loans are available to eligible applicants.
The VA Loan program was set up to help active duty and retired military personnel purchase homes and offer the eligible buyer(s) 100% financing and very competitive interest rates without having to pay mortgage insurance. VA Loans are guaranteed by the Veterans Administration and most of the time they are easier to qualify for. USDA Loans are not restricted to military personnel and offer the same benefits of competitive interest rates and 100% financing. Buyers must meet eligibility requirements, so let’s take a closer look at USDA Loans.
What is a USDA Loan and Who is Eligible?
USDA loans are kind of a hybrid between a conventional and government loan. They are a conventional loan with a conventional appraisal; however, the appraiser must confirm that the home meets the FHA handbook codes for its health and safety requirements. A USDA Loan, also known as a Rural Development Loan or Rural Housing Loan, is guaranteed by the US Department of Agriculture and serviced by direct lenders who meet federal guidelines. Closing costs may be paid by the seller or financed into the loan and there is always a fixed rate with no specific loan size limitation. The borrower can only finance closing costs up to the appraised value if the home appraises for more than the sales price.
USDA Loans are structured like conventional loans but differ in the down payment required. USDA Loan benefits include:
- No down payment required
- No monthly mortgage insurance
- Flexible credit guidelines
- Low interest rates
- Ability to add cost of eligible home repairs and improvement to closing
Eligibility is based on the buyer’s financial history and the property for sale. Buyers must meet a qualifying monthly debt to income ratio of 29% for all household costs and 41% when the monthly mortgage is added. USDA assesses a 2% guarantee fee to all loans which can be financed into the loan. The buyers may not own another home within commuting distance of the property purchased with a USDA loan. To learn more about the eligibility requirements and to see if the property you’re interested in is considered rural development, visit the USDA website.
USDA Loan Types Offered in Virginia
Currently there are two types of USDA Loans offered in Virginia for single family households. Those available are the Guaranteed Rural Development Loans and the Direct Rural Development Loans.
The Guaranteed Rural Development Loan is the most common type in Virginia. It allows the buyer to have higher income limits and offers 100% financing for home purchases. Applicants’ income may not exceed 115% of median household income for the area and all loans carry 30 year financing terms with fixed interest rates.
The Direct Rural Development Loan is less common and only available for low and very low income households. Very low income is defined as below 50% of the area median income (AMI). Low income is considered 50-80% of the AMI and moderate income is defined as 80-100% of the AMI.
Who is Eligible in Virginia?
Eligibility may vary from state to state so it is important to consider all the requirements to ensure that you qualify. In Virginia there is no set maximum loan allowed; however your debt-to-income ratios will determine how much you are eligible for. According to stated guidelines, applicants must meet 29/41 percent; however, all loans are run through USDA’s automated underwriting system called the Guaranteed Underwriting System (GUS) and a borrower can be approved with higher debt ratios based on higher credit scores, job stability, some financial reserves, as well as other factors. The household monthly income must be within the USDA allowed maximum income limits for your area. For the guaranteed housing program, the income limits are grouped largely based on family sizes of 1-4 and 5-8. So borrower(s) with 1-4 members need to have an income that does not exceed a certain number and that income threshold increases significantly for families with 5-8 members. There are other ways to expand that income like documenting child care costs and having a disabled family member. In the Washington DC MSA, the base income limit before add-ons is $101,000 for 1-4 members and $133,300 for 5-8 members. The maximum loan amount is 102% of the appraised value of the home. This includes the 2% USDA Loan guarantee fee. A credit score of 620 is required and families must be without adequate housing but able to afford the mortgage, tax and insurance. Properties purchased with a USDA Loan must be owner occupied (OO) and located within “rural areas”. The “rural area” definition is not always what one would expect and can change based on each census tract update. Most of Loudoun County will qualify as except for the Sterling area and homes within the town limits of Leesburg. Other parts of Leesburg not in the town limits are eligible. Changes will be coming October 1st to the Loudoun County areas that will qualify.
This is just a brief overview of USDA Loans. For more information or to assess your eligibility status for a USDA Rural Home Loan, contact a qualified lender to discuss your options or visit the USDA website. Content for this blog was reviewed by:
Vice President of Mortgage Lending
1800 Alexander Bell Drive, Suite 400
Reston, VA 20191