The Home Buyer's Korner

Information presented should be used for educational purposes only.

March 26th, 2015

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GREATER ELK GROVE CALIFORNIA

The Home Buyer’s Korner

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USDA/RHS Rural Development ~ How It Works

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USDA/RHS Rural Development requires a home to be guaranteed under its program must be within a rural location with no more than 35,000 existing residences. To be eligible for a USDA/RHS Rural Development Home Loan, the home buyer must be ineligible for a conventional mortgage loan and generally created to help out low-to-moderate income borrowers become homeowners.

Property/Occupancy Requirements

The USDA/RHS only guarantees primary residences, but several types of properties such as:

  1. Approved Condominiums
  2. Townhomes
  3. New or Existing Single-Unit Dwellings
  4. Modular Homes
  5. New Manufactured Homes

USDA/RHS Rural Development has a specific checklist of items a home must have to be eligible for a mortgage. For instance, a USDA/RHS loan can only be used for a new manufactured home and if a home has a pool it value must be excluded from the value when completing an appraisal. The home must be of a certain size and reasonable cost, including acceptable living condition, but repair funds to cure some issues is available..

Credit Score/History Requirements

The USDA/RHS home loan program does not have a minimum credit score requirement set for borrowers to be considered eligible and allows for up to 100% financing, but most lenders have what are called lender overlays that set a minimum FICO credit score of 640.  That said, if a borrower has really limited credit history, this usually does not disqualify a home buyer from a USDA/RHS Rural Development Home Mortgage, however, an alternative credit history will have to be well documented. For home buyers who are just starting to building their credit they may be able to use items like 12 months of utility statements, auto insurance payments, cell phone payments, rental history and buy here/pay here resources as that alternative credit verification.

It’s imperative that home buyer have any 30-day late payments show up in their credit within the past year. If a home buyer does have any late rent payments, there may be no more than two within the past three years and you’ll need to provide a reasonable explanation why it was late. Tax liens and delinquent student loan debts are almost always a path to loan denial. However, some lender will consider loan approval these liens or delinquent debts have an existing repayment history established and a payment history that show good faith of repayment.

Appraisal Requirements

A qualified appraiser must be used during the required appraisal process, meaning that the appraiser must be licensed and listed as an approved USDA/RHS appraiser within the region of the property.  For some areas it can be difficult to find such an appraiser who can make the available time to inspect your home, so if you’re in an extremely rural area make sure your real estate agent and mortgage lender work together to ensure they can get your home inspected within the time frame of your sale contract.  Additionally, your seller will need to make sure the home is in good shape when it’s inspected, as home in the locations that need a follow-up inspection to ensure any repairs are made can create huge delays and make your go past your set closing date. 

Your local USDA/RHS Rural Development office is aware of these extreme locations and can offer some assistance.

  1. Third Party Appraisals – Under unique circumstances and only when approved by the USDA/RHS, a participating lending institution may use their own appraiser.
  2. Compliance – All appraisers are to abide by the Uniform Standard of Professionals Appraisal Practice.
  3. Timeline – The mortgage lender must be the one to set the appraisal within three business days for the property that is in the process of approval by the USDA/RHS.

Co-Applicants/Borrowers

Usually allowed when trying to qualify for a USDA/RHS Mortgage, home buyers may utilize a co-borrower/co-applicant to sign on the loan in cases where the home buyer’s income is insufficient to make a payment on their own.

There are a few things that a co-borrower should take into consideration given that they will become partially responsible for a loan, such as:

  1. Co-borrowers are legally responsible for any past due loan payments.
  2. The Co-borrower must also live in the home as a resident
  3. Must have enough credit to add to the loan for approval

It is very important for co-borrowers/co-signers to decide whether or not they would want to be held accountable for the loan, considering that a default or non-payment of the loan may reflect on their credit later on down the road.

Closing Costs

At the time of closing on the loan, there may be closing costs, such as:

  1. Escrow
  2. Origination
  3. Notary
  4. Title Insurance
  5. Lender Fees
  6. Credit Repair Costs

Keep in mind that it may be possible to negotiate and have closing fees wrapped into the loan as well, if the property has sufficient value. USDA/RHS also has no limit to seller concessions in situations when the appraiser provides comment that the additional seller concessions over 6 percent do not negatively impact the value.

Because of the zero down payment and 100% financing available, USDA/RHS Rural Development is definitely a great loan for first-time homebuyers who are looking to purchase in a rural area.

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CALIFORNIA HOME OWNERSHIP TOOLS

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