One mortgage loan program popular in the last few years is the USDA loan. The program allows for you to buy a home with no money down and low monthly mortgage insurance. Here’s what you need to know if you’re interested in this type of financing.

What the program entails

The US Department of Agriculture offers a mortgage loan program to help less industrialized areas gain a greater density of home ownership. The USDA determines certain areas per county nationwide that allows you to use no money down and buy a home using 30 year fixed rate mortgage. For example Sonoma County, California, there are a few USDA eligible areas. In addition, you cannot make more than $97,000 per year of household income.

Location is everything

USDA will only work in an area where you can buy single-family home up to $375,000. In other words, if you’re attempting to buy in Sonoma County where the median home price is far above $375k, you may find a USDA loan does not suit your needs. Here is a local market reality-rewind the clock back to 2012 using our Sonoma County example. The median home price back then was $325k and as such, USDA loan were very popular as USDA’s viewpoint on affordability was consistent with the local housing market. In many markets nationwide, the average median home price per area has risen, far exceeding $375k in many pockets. To put things in perspective in order to qualify for a house in the $425k-450k price range you need to be earning $97,000 per or more, subsequently being ineligible for USDA. This income to payment depiction is also based on you not carrying any other monthly obligations. If you do carry personal obligations such as a car loan, student loan, or credit card payments, you would need even more income further pushing you out of the USDA box. USDA loans bare a strong debt to income ratio requirement at 31% as well.

Practical for your market

Talk with a lender and learn how much house you can qualify for. Talk with a real estate agent. Learn and understand the average price for your area and what kind of home prices is available in your budget. To purchase a house in Sonoma County, California for example you’re going to need at least $20,000 to get your foot in the door. More than likely it will probably mean having to look at a different type of mortgage loan program such as an FHA loan which would require a 3.5% down payment and is significantly more flexible on the debt income ratio requirement. Alternatively,  a 5% down conventional loan also could be more appropriate for you financially and like FHA has no limitations on location or household income.

Until the USDA sets their requirements more alignment with many local housing markets, USDA loans as a viable option, will be further and further away from potential home buyers. The biggest obstacle aside figuring out which mortgage loan program is most suitable for you and your financial needs is getting the house in contract. Not all, but many sellers consider a USDA loan offer from a client with 100% financing to be not as strong as the borrower coming in with down payment funds. This alone maybe more opportunistic in terms of getting an offer accepted in the area in which you want to purchase with significantly less barriers and obstacles, than going with the loan that contains requirements inconsistent with the local housing market.

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