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Understanding Mortgages

USDA Loans - do I qualify?

What are USDA Home Loans? Do I Qualify?

Deciding between rural and suburban is one of many choices you'll make along your homeownership journey. And if the countryside is your preference, then you may want to consider applying for a USDA loan. You've probably heard of the USDA loan program, as it's one of the more popular mortgage loans available. However, you may not know too much about the particulars, such as whether you qualify, what closing costs are like and which mortgage lenders offer them. 

You're about to learn more about all this so you can determine if this loan is right for you. 

What is a USDA-RD loan?
The USDA loan program is a mortgage offering backed by the United States Department of Agriculture. More formally known as a USDA-RD loan - the RD short for "Rural Development" - this mortgage product is geared toward families who plan on buying in a rural neighborhood. Rural home loans are designed to provide low- to moderate-income families with more of an opportunity to buy a home at an affordable price. Due in part to high demand and stretched inventory, home prices are on the rise in most locations. Indeed, according to the most recent estimates from the National Association of Realtors, the typical single-family residence in the U.S. costs around $280,800. As of July, existing-home prices have increased for 89 months in a row on a year-over-year basis.

Of course, a USDA loan doesn't reduce the cost of a property's listed price, but it can provide certain benefits that may make it a bit easier for borrowers to qualify. For example, you may be eligible for a lower down payment than you would be with a different mortgage product, perhaps even 0% down.

What are the main advantages of a USDA-RD loan?
Low or no down payment loans often get mischaracterized as mortgages that box borrowers in, leaving them with fewer options in terms of where they can buy their house or for what purposes. This certainly doesn't apply to USDA loans. They allow for a great deal of flexibility. For example, aside from buying a residence, you can also use this mortgage for refinancing or home improvement purposes. Additionally, you may be surprised by the loan amount for which you're eligible. This depends on the state you live in and how much you earn. USDA loans have fixed interest rates and are typically sold in 15-year and 30-year increments. 

Furthermore, closing costs can be arranged so that they're included in the financing or paid in full or in part by the seller. 

Another mischaracterization of rural loans is that since they only apply to rural locations, this prevents borrowers from considering houses that are in or near the city. However, what qualifies as "rural" applies to 97% of America's land area, according to the latest estimates from the U.S. Census Bureau. Translation: You likely have more options to buy outside the city than within.

Picture of a houseWhat's the difference between a USDA direct loan and USDA guaranteed loan?
As a first-time homebuyer, it's important to understand the distinctions between a USDA direct loan and USDA guaranteed loan. While they both are provided through the Department of Agriculture, they're geared toward slightly different audiences. For example, the USDA guaranteed loan is typically taken out by borrowers who earn a moderate income, while the direct loan is designed for families who make substantially less per year than what's typical in their area, or low to very low. What qualifies as "low income," "moderate" and "very low" varies, but generally speaking, low income is 50% or less of the median salary in a given area while moderate is between 50% and 80%.

Another way USDA direct and USDA guaranteed loans differ from one another is who backs or finances them. For the former, it's the USDA directly, but for the latter, private lenders provide the funding.

As you might imagine, the qualifications necessary to be approved for a USDA direct loan versus a USDA guaranteed loan are also a bit dissimilar. Take credit history. For the direct home loan program, applicants need a "reliable" FICO® score of at least 640 ("reliable" in this context means three or more trade lines in the previous two years). For the guaranteed home loan program, the "validated" credit score minimum is 640 ("validated" is defined by USDA as two or more trade lines opened in the previous year or more).   

Which one is best for you? That's something your lender can help you determine based on your needs and financial circumstances. 

Couple sitting with a loan officer

Who qualifies for a USDA loan? 
As with most things in real estate, determining whether you qualify for a USDA is a case-by-case basis. Several factors are taken into consideration. For example, the property you plan on buying must be used as a primary residence - as opposed to a vacation home - fall within an "eligible rural area" as determined by the USDA, and the owner must meet certain income requirements. It's this last factor that has several parts to it:

Location
As the old saying goes, real estate is all about location, location, location. Area influences the style of house you're likely to see and the amount of money you can expect to spend. Not only do prices in regions of the country vary considerably, USDA loans are only available for properties with rural zip codes. Because populations are always changing, what may be considered a rural area today may be different a year or two from now. This makes it difficult to determine with precision whether the property you want is in a rural part of the U.S. Once again, your lender will be able to provide the certainty you need. 

Debt to income
DTI refers to how much of your monthly earning goes toward paying expenses. The lower the percentage, the more money you have to use at your discretion. Generally speaking borrowers should have a DTI ratio no higher than 41%. There may be exceptions to this, which your mortgage lender may point out depending on your financial situation.

  

Credit history
Your credit reflects how consistent you are with making payments in a timely fashion. It's determined through your credit or FICO® score. Factors that influence your score include the amounts you owe, new credit, payment history and types of credit. USDA loans typically require a FICO® score of at least 640. Much like your DTI, your lender may have a different standard and, the credit score you need may also depend on whether you're applying for a USDA guaranteed loan or a USDA direct loan. We'll discuss this further a bit later. 

Income
You'd be hard-pressed to find two borrowers with identical incomes. Similarly, the earnings of eligible USDA loan borrowers run the gamut. The minimum or maximum income amount depends in part on whether you're taking out a direct loan or a guaranteed housing loan. If it's the latter, you may be able to earn more than what the median household income is for your area and still be eligible (up to 115%). 

Mortgage insurance
Surveys show the down payment is one of the more common barriers Americans encounter when deciding to purchase real estate, particularly among first-time buyers. Perhaps the most attractive aspect of USDA loans is the fact that you may not need a down payment to be eligible. Taking advantage of this aspect may require you to purchase mortgage insurance, though, in case of default. What you can expect to spend on mortgage insurance depends on the other aspects of your financial situation in accordance with your lender's purchase or refinancing options. 

house in an hourglass

When will you get a decision about approval? 
Now that you know a little more about some of the qualifications associated with applying for a USDA rural development loan, you may be wondering about how long you can expect to wait before an approval decision. The journey to homeownership can be summed up in three words: It's a process. Lots of factors are analyzed and documents examined (e.g. paystubs, tax returns, proof of assets, employment information, etc.). Since each individual or family's situation is different, approval timeframes can vary. However, the average period is three weeks (this could be different for each state). Part of the reason for this is the multi-step aspect to authorization. In addition to your lender, the USDA also has to sign off on it before the decision becomes final, and prior to that, there needs to be an appraisal done on the property that you seek to buy. 

There are a few things you can do, however, to speed up the process. For example, do your best to have all the information your lender asks for when they need it. This may include two years' worth of W-2 forms, tax returns, your credit report (or Social Security number so your lender can run a check) and a street address for your employer. You may also want to include the phone number of the business you work for as well.

Woman doing paperwork

You should also strive to avoid any drastic expenditures while your application package is processing. Life is literally event-full, involving milestones, memories and major purchases. But while you're awaiting a decision, put any forthcoming changes on the back burner for the time being. For example, if you're looking to buy a new car or go on an all-inclusive vacation, save that for some other day, as large purchases such as these could raise a red flag.

Finally, be reachable. There are a lot of working parts to applying for a rural development loan, and things may come up that your lender may need to talk to you about. Getting back to your lender in a timely fashion ensures that the approval process doesn't take any longer than it needs to. 

If homeownership is your aim, a USDA home loan can help you reach the target. Please contact Residential Mortgage Services - we'll guide you home. 


Helpful Tips

keyboard and coffee cup

Here is a way to protect yourself from predatory lending,
potential identity theft and telemarketers

Important Notice to All Borrowers:

Did you know that when a mortgage inquiry is logged on your credit report, your personal information is then automatically added to lists that are being sold by Experian, Trans Union and Equifax to certain kinds of mortgage lenders?

Predatory lending is a serious issue, especially in times of economic downturn, when unscrupulous mortgage lending companies become more aggressive in luring in home-buyers with bait-and-switch tactics. Additionally, the more companies that have your personal credit data, the greater the risk that you will become the victim of identity theft.

Consumer Credit Opt-Out

The good news is there are preventative measures you can take to protect yourself from predatory lending, potential risk for identity theft and even hassling telemarketers:


You will need to provide enough personal identification for this service to verify it is correctly removing your personal record from the marketing lists. In addition to being removed from these new lists, you may also choose to be removed from the lists that are currently sold to credit card companies to generate pre-approved card solicitations. You can opt out for a period of five years or permanently.


Understanding Mortgages

Can you refinance a jumbo loan

Can You Refinance a Jumbo Loan?

With apologies to noted author Charles Dickens, "A Tale of Two Cities" might be the best way to describe the current state of housing. On the one hand, you have fixed rates. Unlike the 1970s, where higher interest rates were the norm, they're currently at record lows, averaging 3.75% for the week ending July 25, according to Freddie Mac.

On the other side are home equity and asking prices. With home loan applications moving at a feverish pace, combined with low inventory, home values continue to climb, having risen far beyond 12 months straight - but 88 months in a row, based on the most recent statistics available from the National Association of Realtors. In some metropolitan areas, median existing-home prices are above $500,000, prompting many people to apply for jumbo loans, which are non-conforming mortgages that exceed the limits set by Freddie Mac and Fannie Mae (i.e. $484,350). Although jumbo loans tend to have stricter approval requirements than conventional loans or USDA-RA loans - such as a higher down payment - they can be worthwhile because jumbo loans offer flexibility, with monthly adjustable-rate mortgage payments or fixed-rate mortgage payments.

Woman raising her hands in questionWith these two realities as a backdrop, it raises a key question: Are jumbo loans so flexible as to allow for refinancing? In other words, can you refinance a jumbo loan to take advantage of today's more affordable interest levels, which have dipped rather appreciably since 2018?

The short answer: Yes. But before we get into the finer details, it's helpful to get an understanding of just what refinancing means and why so many people are taking advantage of it.

Why should you refinance?

At its core, refinancing allows you to reduce what you spend in monthly payments. Generally speaking, when people apply for mortgages, it's typically for purchasing purposes, as detailed weekly by the Mortgage Bankers Association. But in recent months, applications are increasingly for refinancing motivations. Indeed, for the week ending July 26, more than half of all applications were filed to take advantage of refinance rates.

Even an incremental difference in lower interest can result in tens of thousands of dollars saved over the life of a loan, hence the reason why more mortgages are taken out for better loan terms and refinancing for a lower loan amount.

All that being said, since the underwriting standards for jumbo loans are more stringent than conventional loans, you may wonder whether the same standard applies to refinance a jumbo. Well, let's take a look:

Scale with a score of 710 highlightedCredit score

Your credit report has a lot of information on it, but the data most relevant to refinancing approval is your FICO® score. The higher it is, the better you are about paying your bills on time. Generally speaking, your score should ideally be above 700, but it's possible to still qualify with a lower score. Just be mindful of the fact that the degree to which your rate is lowered may in part depend on the score spectrum.

Debt-to-income ratio

Your debt-to-income ratio, which is represented as a percentage, shows how much of your monthly income is devoted to ongoing payments. It's determined by adding up what you spend on things like your car loan, credit cards and other installment loans and dividing the sum by what you earn in monthly salary before taxes. For example, if your DTI is 33%, that means one-third of your earnings per month goes toward debt. To get a Qualified Mortgage, the highest ratio allowable is 43%, according to the Consumer Financial Protection Bureau. The same rule holds for refinancing a jumbo loan - the maximum is 43%.

Loan-to-value ratio

Here's another data point that is based on a percentage, only this one tells you how much you're borrowing versus the asset or loan you seek to obtain. Like the DTI, it involves addition and division, but instead of how much you earn, it's based on how much you borrow compared to spend. An LTV of 70%, for example, means that 70% of what you're borrowing is the equivalent worth of the house. The lower the LTV, the less risk involved for your lender because you have more skin in the game, which is usually in the form of a down payment. Generally speaking, refinancing a jumbo loan requires an LTV of no higher than 80%.

Similar to approval for a jumbo loan, refinancing one typically entails a down payment of 20% or more, but in the form of equity you have in the property.

Loan default

Another issue your lender will want to look into is whether you've defaulted on any loans or credit card payments. They'll want to ensure that you haven't experienced bankruptcy within the previous seven years, but again, the specific number of years may be different and taken into consideration in concert with other variables.

Traceable cash flow

Similar to approval for a purchase loan, a refinance loan entails a paper trail. Expect to be asked for at least two years' worth of tax returns, W-2 forms, bank statements from the previous month and pay stubs, usually from the two most recent periods.

A nice living roomShould you refinance?

Refinancing, much like actually applying for a house, is a highly personalized process that is loaded with different factors that ultimately dictate whether you'll be approved. However, just because you can refinance a jumbo loan doesn't necessarily mean that you should. Interest rates may be such that making the move is not in your financial interest. Further, you may have already paid off enough of the principal that refinancing at this point doesn't make sense.

If you still have questions about approval and the documents to gather, talk to your lender. They'll go through it all so you're clear on how - or whether - to proceed.
 


Helpful Tips

Paint cans in different colors

Update Your Home's "Curb Appeal" on a Budget

Simple Inexpensive ways to increase the value of your home:

Whether you are trying to get your home ready to sell, or just looking to increase your investment, there are many inexpensive ways to add value to your home in a weekend.

Add curb appeal:

  • Paint your front door with a pop of color to make your home stand out and look welcoming. Replace your door knob if it is shaky or dated. The front door can set the tone for potential buyers.
  • Make sure your yard is neat and free of weeds and add a few inexpensive plants that are native to your area.
  • Pressure wash your home exterior, deck, sidewalks, and driveway, and wash the outside of your windows to immediately brighten the look of your home.

Updating the interior:

  • Add a fresh coat of paint in a neutral color to your walls. It will instantly make your home appear brighter and newer.
  • Declutter your home. This can make your space appear larger and open, giving potential buyers the perception that there is enough storage in the home for their belongings.
  • To spruce up your bathroom and kitchen without breaking the bank, start with replacing dated hardware. Change out old knobs on your drawers and cabinets, update faucets and shower heads, and replace old lighting.

 

You don’t need to spend $50,000 on a kitchen renovation to show your investment some love. There are plenty of smaller, less involved projects that will make your home look more updated and enticing to potential buyers.


Things to Consider

An autumnal wreath on a door

The Benefits to Buying in Autumn

Most homebuyers think that the best time to purchase a home is in the Spring when lawns are green, trees have leaves, and flower beds are in bloom. Did you know that house hunting in the Fall comes with is own great set of benefits? Buyers will avoid the competition that comes with busy real estate seasons and could even have opportunities to save money if they shop in Autumn!

There is Less Competition:

One of the biggest reasons to buy a home in the Fall is because it is considered off season for real estate so there is less competition between buyers. According to RealtyTrace, over the past 15 years, October buyers paid on average 2.6% lower than estimated market value. With less buyers putting offers on homes in the Fall, it leaves more room for negotiation on price.

Tax Advantages:

If you close on your new home before the end of the year, you may be able to get a tax deduction next April. In addition, many sellers want to close by December 31st so they can take advantage of a tax break, which means that they may be more willing to cut a deal.

End of the Year Sales:

Fall is a great time to buy appliances and furnishings for your new home because of Black Friday and end of year sales.

The Focus is on You:

Since business is slower in the Fall months, Real Estate Agents, Loan Officers, Home Inspectors, etc. have more time on their hands to dedicate to helping you find and purchase your perfect home.

 

Don’t let the lack of green outside, shorter days, and gloomy weather stop you from finding your dream home. You will avoid competition and have some money saving opportunities while house hunting in Autumn.


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