(Mar 25, 2023)
Most people associate the United States Department of Agriculture with rural and agricultural activities. However, the USDA also has a loan program that targets low to moderate-income homebuyers who find it hard to raise a down payment.
Provided the home is located in an eligible area, the loan requirements and process are pretty straightforward. This definitive guide on USDA loans will get you started with the loan process in Marion County.
Are you a Hometown Hero? Find out your eligibility for the Hometown Heroes Loan Program in Marion County, Florida.
What is a USDA Zero-Down Loan?
USDA loans come as government-guaranteed mortgages that ease the homeownership process for low- or moderate-income borrowers. They can help you acquire residential property in eligible rural and suburban areas.
While USDA loans seem pretty new to homebuyers, they offer more favorable terms than VA and FHA programs. These mortgages come from SIngle-Family Housing Guaranteed Loans and Single-Family Housing Direct Loans.
You may take a USDA Direct loan if your income is 50 to 80 percent of the median income in the area you want to buy a home. Unlike USDA Guaranteed loans that private mortgage lenders disburse to low and moderate-income homebuyers, this kind of loan is issued by the government to low-income borrowers only.
Advantages of Taking the Zero-Down USDA Loan
Since they are government-sponsored (insured by the USDA), USDA loans come with several perks. They boast competitive interest rates, zero down payment requirement, and low mortgage insurance premiums, as discussed below:
Zero Down Payment Requirement
Unlike most mortgage programs, the USDA loan comes with a zero down payment requirement. Thanks to this benefit, you can save a lot of cash upfront. You also get a chance to finance a home with a mortgage without putting any money down and have a shorter homebuying timeline.
Gift Funds and Assistance Programs are Accepted
Most loan programs have strict requirements when using gift funds or assistance programs to pay loan expenses such as closing costs and down payment. But with USDA mortgages, you can use these incentives to cover costs efficiently. The loan program also allows you to sign up for assistance programs that come with forgivable loans or don’t allow you to repay the grant.
Competitive Interest Rates
Since USDA home loans come with government backing, private mortgage lenders incur little risk when disbursing loans. They can easily offer lower loan interest rates even if you don’t make any down payment. With these competitive interest rates, you pay less interest and lower monthly mortgage payments over the loan duration.
Lower Mortgage Insurance Premiums (MIP)
Mortgage insurance premiums (MIP) in USDA zero-down mortgages are the equivalent of PMI (private mortgage insurance) premiums in conventional home loans. They are usually a requirement in low-down-payment mortgages.
For a USDA loan, you will pay a lower upfront and annual guarantee fee as MIP compared to FHA and conventional loans. Lenders also allow you to split the MIP payments into 12-month installments by including them in your monthly loan payments.
Available for Multiple Properties
The USDA loan program caters to multiple property types, such as fixer-uppers, single-family homes, manufactured homes, and condos. It can also help you finance a land purchase if the land is meant to hold a new construction home. Vacation homes, investment properties, and multi-unit properties are the only types of properties excluded from this loan program.
Qualifying Locations for the USDA Zero-Down Loans
The USDA was established with a mission to improve development opportunities in rural areas. Due to this fact, it only backs home loans in areas with relatively low homeownership opportunities available to low and moderate-income homebuyers.
One good thing about USDA loans is that they don’t limit you to purchasing a property in a rural area. Other areas with non-rural characteristics (such as suburbs) are eligible, provided they meet the following conditions:
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Severely lacks home loan opportunities for borrowers/homebuyers with low and moderate-income
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Has a maximum population of 20,000 and isn’t situated in a Metropolitan Statistical Area
- Boasts a maximum population of 10,000 and is located in an area with rural character or open country
You can check USDA’s interactive eligibility map for more help in locating an eligible property. The tool allows you to type in the address of the property you’re interested in and narrow your search to a particular area. In the context of qualifying locations, the phrase “rural in character” implies that the area has a population density not exceeding 1,000 people per square mile.
Income Limits for the Loan Program
Like other government-backed mortgages, USDA loans have income caps that you are supposed to meet. Participating lenders also use various metrics when calculating your income for the loan.
Factors such as your qualifying income, eligibility income, and adjusted eligibility income determine whether you qualify for the loan. Your qualifying income equals your total income and is used to determine your ability to repay the loan. On the other hand, your eligibility income is the total income earned by your household members (adults only) and is used to determine your eligibility.
Adjusted eligibility income is the income you remain with after deductions are made. Lenders use this income to determine whether you can afford monthly mortgage payments.
Credit Score and DTI Requirements
For a USDA loan, you need a minimum FICO score of 620 to be considered for the mortgage. While the USDA doesn’t have any credit score requirements, lenders have the freedom to set the score range at 620 to 640.
Depending on the mortgage lender, you may enjoy more flexibility in the credit score requirements. The lender will check your on-time payments, defaults, or delinquencies as part of your credit history. If you have any defaults, they may require you to produce a letter explaining why they happened and why you’re unlikely to default on your USDA loan.
Requesting quotes from multiple lenders can get you the best credit score deal on the home loan. It can also boost your chances of qualifying for a loan with a low credit score.
Debt-to-Income Ratio (DTI) Requirements
The debt-to-income ratio usually encompasses total monthly debts divided by the total monthly income. Most USDA-approved lenders require a maximum DTI of 41 percent to consider you for a USDA home loan. You may also qualify for the loan without meeting this DTI requirement if you already have certified approval from the computerized underwriting system run by the USDA.
USDA Loan Limits and Property Requirements
While there’s no loan amount cap under the USDA Guaranteed Loan program, expect a limit when taking a USDA Direct Loan. The Direct Loan program caps the purchase price for eligible properties at $336,500 in most locations in the country and $970,800 in places with a high cost of living.
As for the property requirements, the property must be situated in a qualifying location (rural or suburban area). It should also meet basic requirements, including adequate water access, connection to wastewater systems, a safe structure, and functioning plumbing/electricity. Other conditions it must meet include the following:
- Square footage not exceeding 2,000 square feet
- Modest and residential character
- Square footage of at least 400 square feet
- Have a moderate acreage (which isn’t large enough to be used for commercial purposes or undergo subdivision)
Besides meeting these USDA-specific property requirements, the home must pass an appraisal. Any issues identified in the appraisal may stop the home purchase from closing. Therefore, you must address these issues in 15 days to ensure they meet USDA property guidelines.
Your options for addressing these issues include negotiating with the seller on a lower purchase price or having the seller fix them before the closing date. You should also sign a statement acknowledging that the work done was satisfactory for closing the loan.
Do USDA Loans Have a PMI Requirement
PMI, an abbreviation for private mortgage insurance, is usually required on conventional loans but not USDA loans. It applies to mortgages that require a 20 percent down payment.
In the context of USDA home loans, expect a mortgage insurance requirement to cover the lender’s risk of originating the loan. The MIP (mortgage insurance premium) is like an insurance policy that protects the lender if borrowers default on payments.
MIP is billed as a one-time upfront guarantee fee of 1 percent of the home loan. It also comes in the form of 0.35 percent paid yearly or in 12-month installments with your monthly mortgage payments. Compared to other loan programs, the USDA loan program has a lower mortgage insurance requirement, resulting in higher loan cost savings.
The USDA Loan Process: What to Expect
Expect the USDA Loan process to be slightly different from other loan types since it requires USDA approval. Since it may also take a little longer for the USDA to approve your loan, you should budget for the loan costs and have realistic expectations. Without further adieu, here are five steps to expect in the process:
Review Your Finances
As with other mortgages, you must review your finances to determine whether you can afford a USDA loan. Consider checking your credit score and calculating your monthly debts and expenses. You may have to put some money down if your credit score is low or qualify for the zero down payment loan with a good credit score.
Get Prequalified with a Participating Lender
You need to be prequalified for a USDA loan to estimate the maximum amount you can borrow. Though it’s not a guarantee, a prequalification helps verify your finances before lenders decide to offer you a loan. If prequalified, you will receive a prequalification letter that can help you narrow your home search to properties within your budget.
The prequalification letter assures realtors and sellers that you are in a position to afford a loan to finance the home purchase. You should work with a mortgage lender with adequate experience originating USDA loans.
Submit Your Offer
With the prequalification letter, you can search for a property you like on the USDA eligibility map. Your real estate agent may also help you find USDA-eligible listings if they are familiar with USDA loans.
Either way, you should submit an offer to the seller to show interest in the property. Consult with a real estate agent to draft a firm offer that is likely to be accepted.
Once the offer is accepted, your mortgage lender is supposed to schedule an appraisal. You can also get the property inspected for things such as pest infestation.
Provide Additional Underwriting Verification
If the property passes appraisal and inspection, the lender will ask you to give additional documents for loan processing. These documents include tax forms, employment records, and bank statements.
Once they verify these documents, you must wait for an official USDA approval. You can check the rural development site on the USDA website to see if your loan is in the current queue for USDA reviewing.
Schedule a Closing and Funding Date
With your lender’s help, you can schedule a convenient closing date in which you’ll be required to sign the loan paperwork. The lender will also arrange for an appropriate funding date at least two days after the loan closes. During funding, money will be disbursed to your preferred account, making you an official owner of the home.
Top 5 Fun Outdoor Activities to Make Your Stay in Marion County, FL Memorable
Situated centrally in the Sunshine State, Marion County, FL, boasts a wide range of outdoor recreational activities you can engage in. From horse riding and hiking to diving and snorkeling, there’s something for everyone. Here are five of the best outdoor activities to make your stay in the county memorable:
Take Farm Tours at the Gypsy Gold Horse Farm
Nestled under the aged oak trees at the heart of the mighty Ocala, Gypsy Gold Horse Farm boasts a variety of farms and ranches. The farm also makes Ocala a great horse destination across the country.
Gypsy Gold Horse Farm is home to unique horse breeds originating from Europe. It also offers thrilling farm tours that will let you discover the history of the breeds, meet stallions, foals and mares and have fun photo op sessions.
Go Swimming and Picnicking at Rainbow Springs State Park
Rainbow Springs State Park is an excellent destination for swimming in Marion County, FL. It also features sloping hills, constructed waterfalls, and ornamental gardens that capture the history of the state park.
Besides swimming, you can also hike through the lush, mossy hammocks in the park and explore the springs. Other fun outdoor activities in the state park include birding, camping, wildlife viewing, snorkeling, and paddling.
Snorkel or Dive at Rainbow River
The Rainbow River offers memorable scuba diving and snorkeling thanks to its unmatched crystal clear water with more than 200 feet of visibility. A boat ride lets you explore different types of turtles and fish in the waters. You can also discover fossils at the river or hang out with family and friends by the riverside.
Hiking at Sholom Park
If meditative walking is your thing, check out Sholom Park for its 45-acre well-manicured massive grassy lawns, hardwood hammocks, landscaped thematic gardens, and climax sandhill forest. These trails allow you to reflect and absorb the surrounding natural sceneries for memorable experiences.
Ride Through the Canyons Horseback Trail
The 1.5-hour horseback tour at the Canyons Horseback Trail takes you throughout the Canyons park. It promises a scenic and fantastic horseback ride with picturesque views of scenic vistas, lakes, and the surrounding woodlands. The tour also takes you through enormous cliff walls and elevation changes of 100 feet for an adventurous experience.
Summing up
USDA loans are a great option if your homeownership journey is filled with obstacles such as down payment requirements. Once you organize your finances and meet the lender’s minimum loan requirements, you are ready to get qualified for the mortgage. With this type of home financing on your side, you get to enjoy flexible loan terms and, lower mortgage insurance, competitive interest rates, among many other benefits.
(Mar 25, 2023)
