So many prospective buyers look for a way to purchase a home with little to no money down. Well, USDA Rural Development Guaranteed loans offer 100% financing qualifying buyers. But in addition to buyers qualifying, the property must qualify as well. Although USDA is extremely beneficial for buyers and sellers, USDA eligibility is a little different from other loans. USDA Rural Development made recent revisions to the guidelines for minimum property requirements. So let’s explain these recent changes.
First of all, why consider a USDA home loan? Actually it is the best, little known mortgage available and it isn’t just for first time buyers! One of the biggest roadblocks to homeownership is the down payment. Actually a recent article by Apartment Therapy “Forget Avocado Toast: Here’s How Long It Takes Millennials to Save for a Down Payment” explains how it can take 5, 10, or more years to save up for a down payment in many markets! But USDA does not require a down payment. Therefore, why wait when a purchase could be possible right now?
In addition, USDA even allows for the seller to pay up to 6% of the purchase price in closing costs for the buyer. This feature could make a home purchase truly a no money out of pocket transaction! Furthermore, an affordable monthly payment is key to most buyers. Well, USDA not only has a 30 year fixed rate but it also has a very low financed funding fee and monthly mortgage insurance. When Rural Development lowered the funding fee and annual fee (type of mortgage insurance included in the payment), it made USDA an even bigger benefit to buyers.
As mentioned, besides borrower qualifications USDA eligibility requires properties to be in an eligible area. Then, there are other type of property requirements which have gone through recent changes.
Now let’s talk about the technical details of these changes. Our experienced USDA loan officers are familiar with these guidelines, so feel free to ask questions.
USDA Eligibility Revisions to Handbook 3555
USDA’s guidelines for guaranteed loans are in the USDA Handbook 3555. Just like all mortgage loan types, rules change over time. Although, recently many lending agencies have loosened more rules rather than gotten more strict. The recent USDA property eligibility changes involve…
- Site / Land Requirements
- Income Producing Buildings
- Accessory Dwelling Unit
- Economic Life
- Appraisal Requirements
- Water & Septic
- Flood Insurance
USDA Site Requirements
Prior to this revision, there wasn’t a lot of language about the site or land requirements for USDA. To qualify, a property must be predominately residential in use, character, and design. Additionally, there is no specific limitation to acreage. But the appraiser must explain how the subject property compares to other properties in the area as well as adjustments to comparable properties. Basically, this means there must be similar sold properties in the area to allow acreage.
USDA Income Producing Buildings
Not long ago, USDA Rural Development would not allow properties to have farming characteristics. For example, some rows in a field or hay bales under a barn would disqualify a property. Rules have relaxed since then. The new rules state that a property with buildings primarily for income producing activities are not eligible. But buildings that used to be income producing and are now used for storage are allowed. Furthermore, minimal income producing activities such as a garden are ok. Also home based businesses such as childcare or product sales that do not require commercial real estate are allowed.
USDA Accessory Dwelling Unit
Sometimes a property has an additional living space such as an in-law suite or maybe even a separate dwelling. USDA eligibility now requires that appraisers determine if the extra living space is considered a two unit property.
USDA Zoning & Economic Life
These topics are new to the USDA eligibility guidelines. The property must comply with local zoning and restrictions. The appraisal must reflect if the property is considered legal nonconforming, plus if it affects the value of the property. The condition of a property is important to USDA loans. So the appraisal must state that the remaining economic life of the property meets or exceeds the 30 year USDA term.
USDA Appraisal Requirements
Like all mortgage loans, the appraisal plays an integral part of the approval process. It not only tells borrowers and lenders the value, but also the condition as well. One of the recent changes to the appraisal is the age of it. The appraisal may be up to 150 days old at closing rather than 120. Although the appraisal may be up to 240 days old at closing with a one time re-inspection completed by the appraiser. Check out our article “Appraisal Issues – Learn the Reasons Plus Tips to Protect Yourself” to learn more about appraisals.
USDA Water & Septic Requirements
When using a USDA loan to purchase a home with a well used for the water source, a water test is required. One of the changes is the water analysis report may be up to 150 days old at closing. The prior requirement was 120 days. Learn more about the well water test requirements in another of our USDA articles. If there is a private well and septic tank, USDA requires they meet the HUD/FHA distance requirements. One of the reasons we use an FHA roster appraiser on USDA loans is because the HUD certifications. In addition to the water / septic distance requirements, the septic system must be free of observable evidence of failure.
USDA Flood Insurance Requirements
For a dwelling located within a flood hazard area, USDA eligibility requires the buyer obtain flood insurance. Additionally, the flood insurance must cover the lesser of the outstanding loan amount or the maximum amount of coverage allowed under FEMA’s National Flood Insurance Program. Unless a higher amount is required by state or federal law, the maximum deductible for flood policies should not exceed the greater of $1000 or 1% of the face amount of the policy. Deductible guidance published by FEMA that may exceed this guidance is eligible.
USDA is Not Just for First Time Buyers
So hopefully if you thought USDA loans were for farms, that notion is gone and you can see that USDA is quite the benefit to buyers. These mortgages can be used to buy very nice $300,000 or $400,000 homes in USDA eligible areas. An important fact to keep in mind is that these no money down loans are not just for first time buyers. USDA could be used to buy your tenth home as long as it is your primary residence. It just has the restriction of owning another home at the same time within a reasonable distance. Hopefully this article was beneficial for you.
The next step towards homeownership is to let our team explain USDA and other loan options. Just give us a call.