The Rural Development loan offered through the USDA is one of my favorite loans. It combines a low-down payment, competitive rates, low mortgage insurance costs, and practical underwriting into an excellent loan option. Despite its low or no down payment requirement it also maintains a very good default record. This is a result of prudent criteria and underwriting practices that insure that a borrower will not be buying more than they can afford.
With an RD loan the mortgage is guaranteed to 90% by the federal government and protects the lender against losses suffered in the event of default by the borrower. The loans are designed to meet the needs of low to moderate income buyers purchasing homes in specific areas as designated by the program.
Some of the loan highlights and features include:
· Zero down loan options. Note that if the buyer has the funds to put 20% down on the house they may be ineligible for an RD loan.
· If the home appraises for more than the sales price the buyer can include their closing costs and prepaids into the loan up to the appraised value.
· The seller can pay up to 6% of the sales price in the buyer’s costs to close.
· There is an income limit to qualify for the program based on the location of the home. All of the adults intending to occupy the house are used to determine the income limits. Even individuals that are not intending to be on the loan may still be included in the calculation. Check with you lender for more on this.
· The program limits the home being financed to certain geographic areas.
· The buyer pays an RD fee similar to that paid on conventional PMI or FHA loans. One difference is that the RD fee tends to be lower than similar low/no down payment programs.
· RD loans are inspected by the appraiser following the same standards as FHA loan. While there may be some variances among appraisers they tend to concentrate on what I call “safety, structural, and health” issues.
· Generally speaking the buyer can only own the home being financed with the RD loan. There are some rare exceptions and you should contact a knowledgeable loan offer to see if you still qualify.
You will find that many lenders don’t offer the program as it tends to be a little more complex and requires additional training for their staffs. You may find some loan officers that do most of their business in non-eligible areas may not be familiar with the RD loan even if their company offers it. As I mentioned earlier, I think that RD is one of the best low/no down payment loans available.