When you think of the United States Department of Agriculture (USDA), you probably think of food safety and meat-processing plant inspections. But did you know the USDA is also in the business of home loans? Yep, the USDA also has as its mission to help families in rural areas become homeowners in order to create strong communities and better lives. So they offer home loans to low- to moderate-income families at great rates and with no down-payment requirement. If you’d like to take advantage of this opportunity, here’s what you need to know about USDA loans when buying a house in Kauai.
Overview of USDA Loans
If you’re considering getting a USDA loan for buying a house in Kauai, then you need to know what it is and a little of the interesting history.
“A USDA loan is a government-backed, no money down mortgage with government-assisted mortgage rates, which means you can get lower rates than with similar government-backed programs like FHA and VA. Since USDA loans don’t require a down payment, you can borrow as little or as much as you need to buy a home – as long as that home is in a ‘rural,’ or less densely populated, area.”
Now, “rural” doesn’t necessarily mean a farm or ranch way out in the middle of nowhere. Rather, in this case, “[r]ural areas might include the outskirts of town, a place with lots of farmland, or a suburb of a large city — really anywhere that’s not considered ‘urban.’”
USDA loans got their start in 1949 when housing was in short supply and millions of people were forced to share homes after World War II. Recognizing that homeownership could build communities and create jobs (along with tax revenue), the USDA implemented the American Housing Act, which resulted in the construction of millions of new homes.
But people had to be able to buy these many new homes. So the government-backed USDA loan program was created.
USDA Loan Requirements
There are, though, some fairly exact requirements for buying a house with a USDA loan. These are . . .
- Location – “If the city you’re buying a home in has fewer than 10,000 residents, your home should meet the USDA definition of a ‘rural area.’ Unincorporated areas also qualify. Some municipalities with up to 20,000 people will qualify for USDA financing.”
- Income – To be eligible, you must have a household income below the USDA limits for the specific area. “The limit is 115% of your area’s median income. If your area’s median income is $50,000, you can’t earn more than $57,500.”
- Property – USDA loans are for primary residences only (though this can include new manufactured homes).
Qualifying Criteria
Buying a house with a USDA loan also means that you’ll have to meet certain qualifying criteria, such as . . .
- A credit score of at least 640 (which is slightly higher than that required for conventional loans at 620)
- A debt-to-income ratio (DTI) of no more than 41% (which is a little stricter than the DTI required for most conventional loans and certainly FHA loans)
- A provable record of at least two years of steady employment
The good news, then, is that “[i]f you meet all of those requirements – and if your home purchase price does not exceed the home’s appraised value – you could buy the home with no money down.”
Process of Buying a House With a USDA Loan
Now when it comes to USDA loans and actually buying a house, here’s how the process typically goes . . .
- Pre-approval – “The pre-approval process shows how your application would perform in a real underwriting process. You’ll get a good idea about your price range and monthly payment size without making any commitments.”
- Finding an eligible house – Typically, an eligible house will be a single-family home in a city or town with a population of 20,000 or below or in an unincorporated area. (To make sure the house you’re interested in qualifies, consult a Kauai agent at 808-634-4518.)
- Loan application – After getting pre-approved, finding a qualifying home, and making an offer, your next step is “to apply for the USDA rural development plan.”
- Following the loan officer’s instructions – “Your loan officer will guide you through the process of uploading financial data for the underwriting process. Be sure to respond to your loan officer’s request for more information as quickly as possible.”
- Home inspection – At this point the home inspection takes place. “The USDA will check out the home you’re buying to make sure it provides minimum safe living conditions.”
- Closing – This is the final step when you get the keys to your new home. “If you’re happy with the home inspection – and if your lender’s underwriters are satisfied with your financials – it’s time to make the home purchase official.”
We’re Here to Help
The beauty of buying a house with this kind of loan is that the USDA “guarantees your mortgage to your lender. By doing this, your lender knows that your payment will get made. This provides lower risk to the lender, allowing them to offer lower interest rates with no down payment.“ The difficulty lies in the slightly stricter lending standards and the fairly narrow property-qualifying criteria. But we’re here to help.
We have experienced agents who can help you find qualifying houses and guide you through the process. If you’re looking at buying a house in Kauai and are considering a USDA loan, contact us today at 808-634-4518.