The USDA guidelines allow for many exceptions that other loan programs do not allow. The standard rules state that USDA funds can be used to purchase a site whether new or an existing dwelling; repairs of an existing home; fees that are standard with the purchase of a home including acquisition expenses, fees charged by the lender, and standard closing costs; and refinancing an existing loan. Alongside the long list of what the USDA will allow is the list of what they will not allow to occur with their lucrative financing program that is guaranteed by the USDA, giving lenders a lower level of risk. Below is a list of the purposes that the USDA will not allow for any financing purposes.
Discount Points Charged by the Lender
The USDA guidelines allow borrowers to use USDA funds to pay for the standard closing costs, up to a point. If there are discount points included in those costs, there is a limit as to what the USDA will allow to be included. Typically, up to 2 points, (2% of the loan amount) can be included but only if the lender can prove that the discount points are strictly to lower the interest rate and not to compensate for risky factors that the borrower poses to the lender, such as a low credit score or high debt ratio. This can be proven by looking at the costs charged to similar buyers to determine if the discount points charged are higher. The discount points must be itemized on the settlement statement in order for the USDA to determine if they exceed 2 percent of the loan amount as well as the reason they exceed that amount.
Purchasing or refinancing a residential property that you use for income producing purposes is not allowed under the USDA guidelines. This includes farming, agriculture, and any other commercial activities that could occur within a home. An exception to this rule is if the home is primarily used for residential purposes, and the borrower has a side gig where a small amount of income is made. Selling homemade items or garden produce for a small amount of income is perfectly acceptable. Homes that are used primarily for income production, however, are not acceptable for a purchase or refinance with the USDA program.
Manufactured housing is an acceptable form of housing for the USDA program, however, there is an exception. The manufactured housing must be new. This means it cannot have existed for the last 12 months and under no circumstances can there have been previous owners living in the home in order to be eligible.
Closing Cost Assistance
Typically, borrowers can include closing costs in the proceeds of the USDA loan; however, there is a maximum allowed amount. Right now that amount is 3 percent of the total loan amount. If the closing costs exceed 3%, so for example, if they exceed $3,000 on a $100,000 loan, they cannot be rolled into the loan amount – instead, the borrower must pay the closing costs out of his own pocket.
The prohibited loan purposes under the USDA guidelines are typically very easy to get around as they are unique circumstances for most low to middle-income borrowers. The most important guideline to keep in mind is the income maximums that every household is allowed. The USDA website contains a chart for each area of the country to help you determine the maximum amount of income your family can bring in and still be eligible for the no down payment, low cost mortgage financing program provided by the USDA.