The USDA Section 502 Guaranteed Rural Housing Loan Program was created to serve residents of rural areas that have low to moderate income. The borrowers that qualify for this program must not be able to qualify for conforming financing and would ,therefore, be ineligible to have safe and sanitary housing options for themselves and their families.
The Guaranteed program enables these borrowers to purchase a modestly priced home as a primary residence. The home can be existing or a newly manufactured residence. The USDA does not fund the loans; they simply provide the guarantee to the lender for 90% of the loan’s value, enabling the lender to fund a loan for 100% of the sales price of the home without worry. This also eliminates the borrower’s need to put up collateral for the loan.
Qualifying for the USDA Section 502 Guaranteed Loan
Even though the USDA program caters to borrowers with low income, there are still guidelines that must be followed. The borrower(s) must have stable and dependable income that can be proven. The underwriter must also be able to determine that the income will continue for at least the next two years. The income must fall within the program’s guidelines for the specific area the home sits; the total income cannot be more than 115% of the maximum allowed for that area.
In addition, the borrower(s) must have a “decent” credit history. This might not mean perfect credit, but a stable enough history to make the borrower a good risk. The lender will also need to determine the borrower’s debt-to-income ratio in order to determine their eligibility. On the front-end, the borrower should not have more than 29 percent of his income required to go towards the housing payment. This includes not only the principal and interest on the loan, but also real estate taxes, homeowner’s insurance, and mortgage insurance. On the back end, the total debt that borrower carries each month must not exceed 41 percent of the qualifying income in order to qualify for the loan.
The Loan Terms
Every USDA Section 502 Guaranteed Loan that gets written has a 30-year term and a fixed interest rate as these are the least risky loans to offer. The loan-to-value can be up to 100 percent, which means the borrower does not have to put any money down. If the borrower wishes to include the closing costs and upfront mortgage insurance fee in the loan, the appraised value must be higher than the sales price and be adequate enough to include these costs. The upfront mortgage insurance fee is equal to 2.75% of the loan amount, so keep that amount in mind when figuring out how much you can afford.
After the loan closes, there is an annual mortgage insurance fee charged which equals 0.5% of the loan amount. This amount is then divided equally amongst the 12 months in the year. This amount gets added to your mortgage payment which includes your principal, interest, real estate taxes, and homeowner’s insurance payments.
The USDA Section 502 Guaranteed Home Loan program is open to anyone that falls within the 115% income requirement for the area. This allows even people with moderate income to qualify for this no down payment program. As long as the home you wish to purchase is within the rural boundaries as determined by the latest census tract, USDA financing can be an option for you. Because it is a low-risk program with fixed interest rates and 30-year terms, the loan program is affordable and easy to qualify for, making it possible for many people to secure housing that would otherwise be unable to qualify.
