USDA Home Loans

USDA Frequently Asked Questions (FAQ)

Below are guidelines from the USDA. Lender guidelines may vary so please verify information with us. 

Appraisal and Property Requirements

Are termite inspections required?

Termite/pest inspections are not required unless the lender, appraiser, inspector, or state law requires the inspection to confirm the property is free of active infestation.  Lenders are responsible for determining if a termite inspection is required based on these factors.

How long is an appraisal valid?  

The appraisal must have been completed within 180 days of loan closing. Appraisals that are older than 180 days at loan closing are eligible for an appraisal update, making the appraisal valid for no greater than one year from the effective date of the original appraisal report.

What is the maximum insurance deductible amount?

For each insurance type (hazard, flood, hurricane, etc.) the deductible should not exceed the greater of $1,000, 1% of the policy coverage, or the minimum deductible offered by the applicant's chosen insurance carrier. 

Does USDA allow financing on new manufactured homes?

New manufactured homes are allowed. New manufactured homes are defined as a new unit in stock that is less than 12 months from manufactured date, which has never been installed or occupied at any other site or location. If the manufacture date is over 12 months, it does not meet the definition of a "new" manufactured home. 

Does USDA allow the financing of existing manufactured homes?

Existing manufactured homes are ineligible unless it is a purchase of an existing Rural Development Section 502 Direct or Guaranteed financed home. However, select states have been included in an Existing Manufactured Housing Pilot program where existing manufactured homes built after January 1, 2006, may be eligible for financing. Please see the Federal Register Notice on this topic for additional information. 

Does USDA allow construction loans?

Yes, there are two options.  The first option allows financing of an interest reserve and a contingency reserve, with interest only payments during the construction period.  The loan is re-amortized at the completion of construction. The second option allows the financing of a (PITI) payment reserve in addition to a contingency reserve.  The loan begins amortizing immediately on a 30-year schedule, eliminating the need for a re-amortization, and allowing the lender to sell the loan prior to the completion of construction.

If a borrower owns existing land, can they build a house on it?

Yes. It will be considered a purchase instead of a refinance.

What is the maximum Loan to Value on a one-time construction loan?

The maximum loan cannot exceed 100% of the value except for the upfront guarantee fee which can be financed above 100%. Excess reserve funds are applied to the principal balance of the loan. 

Is there an acreage limitation?

There is no specific limitation to the size/acreage of the site.  The appraiser must provide comparable properties in the area. In addition, the site cannot have income-producing land that will be used principally for income producing purposes. Vacant land or properties used primarily for agricultural, farming, or commercial enterprise are ineligible. 

Are there minimum or maximum square footage requirements?

There are no square footage requirements or limitations for stick-built housing.  Manufactured homes must have a floor area of at least 400 square feet. 

Are cisterns acceptable?  

Private well and wastewater systems must meet the minimum property standards of HUD HB 4000.1 or the requirements of the local and/or state health authority to be eligible.

Do wells need water testing?  

Yes, water quality tests are required on individual water systems for a purchase but not on a refinance.  The water quality of the well must meet the requirements of the state or local authority. If the state or local authority does not have specific requirements, the maximum contaminant levels established by the Environmental Protection Agency (EPA) will apply. If a water test is required, a water analysis report must be no greater than 150 days old at loan closing. 

Borrower Eligibility

Can an individual who is not a borrower be on title?  

Any individual whose signature is required by state law must sign the security instruments to create a valid first lien.  Rural Development does not prohibit additional parties from being on title.  

Is there a limit on seller concessions?

Seller contributions (or other interested parties) are limited to 6% of the sales price and must represent an eligible loan purpose. 

Is it acceptable for the seller to pay the upfront guarantee fee?

Yes, seller contributions may be used to pay all or part of the upfront fee.

What happens to excess seller contributions?

Excess seller contributions can be applied toward a principal reduction or be returned to the seller.

Are principal reductions acceptable?

Yes, and there is no limit on the amount of a principal reduction. 

Does USDA allow a 2-1 buydown rate?

Temporary buydowns are allowed if the requirements in HB-1-3555, Chapter 11 are met. 

Can a seller pay for repairs?

The seller can pay for repairs prior to closing.

Can repairs be financed in the loan?

Yes, repairs associated with the purchase of the dwelling are an eligible loan purpose. 

Are co-signers or non-occupant co-borrowers allowed?

No, co-signers and non-occupant co-borrowers are not permitted. 

Refinance Eligibility

How many payments have to be made before refinancing?

The existing loan must have closed 12 months prior to the date the application is submitted to the Agency. The 12 months is based on the date the loan closed, not the number of payments made. 

Are income and assets required for a streamline refinance?

Yes, maximum income limits still apply, therefore, income and asset documentation must still be obtained however streamlines are not subject to ratio requirements. 

Is a Streamlined or Streamlined-Assist refinance limited to the initial loan amount?

No, the refinance transaction is not restricted to the initial loan amount.  The maximum loan amount may include the principal and interest balance, eligible closing costs, and the upfront guarantee fee.

Can discount points be financed on a refinance?

Discount points to reduce the interest rate are eligible on all loan options. Discount points charged for reasons other than to reduce the interest rate are ineligible. 

Assets

What is considered a large deposit?

Anything greater than or equal to $1,000 is considered a large deposit and any recurring deposits of the same amount.

What documentation do you need to provide for a large deposit?

A copy of the check and explanation of what it is and where it came from. 

Can 401k or IRA funds be used for reserves?

Yes, up to 60% of the vested amount minus any loans.  Retirement accounts that restrict withdrawals to circumstances involving the applicant’s employment separation, retirement, or death should not be considered as a cash reserve. 

Is there a limit on the amount of liquid assets an applicant can have in reserves?  

No, there is not a specified limit on the amount of assets. However, the test for conventional credit, based on the requirements of 20% down apply. 

Who is considered an eligible gift donor?

Gift funds may be received from any uninterested third party as long as the documentation requirements of chapter 9 of the guide are met.

Is a bank statement from the gift donor required?

Yes, to properly source gift funds the lender must obtain a gift letter stating the funds do not have to be repaid and a bank statement from the donor as evidence of funds.

Do large deposits on the gift donor’s bank statement need to be sourced?

Rural Development guidelines do not go into detail about the source of the donor’s gift funds, except that cash on hand is not an acceptable explanation for the source.  It is the approved lender’s responsibility to identify any lender/investor overlays that may apply to this scenario. 

Credit, Liabilities, Collections and Bankruptcy

What is the minimum credit score?

Minimum Credit Score – 640+ score with GUS approval. A manual underwrite may be approved with a credit score as low as 580. A borrower with no score due to not enough tradeline history, will have to have 3 non-traditional tradelines including a 12- month positive rental history. Usually when GUS approves these, it is due to strong income and length of employment and strong assets as well. This doesn’t happen often, most of the time a score is usually needed.
-USDA can go lower than 640 on a “Manual Underwrite”, but at least 1 applicant must have 1 credit score. On a manual underwrite, there are added requirements such as debt to income ratio maxes, tradeline requirements and possible reserves.

How many credit scores are required?

Only one credit score is required as long as the score has been validated.

Do all borrowers need to meet the validated credit score?

At least one applicant must have a validated credit score. The other applicant(s) are not held to specific tradeline requirements.

What is the max debt ratio?

If there is a GUS approval, there is no max. If file is a manual underwrite, 29/41 is standard. Debt ratio can go as high as 32/44 with a 680-credit score, 12 months positive verification of rent and 3 months PITI reserves (Reserves have to be borrowers' own funds).

Can a borrower be delinquent on Federal debt?

No, the applicant is ineligible even if the CAIVRS is clear unless the debt is paid in full. 

What is the payment calculation used for a student loan debt?

Use the actual documented payment when the payment is greater than zero or .50 percent of the outstanding balance when the payment is zero. 

Are medical collections required to be paid?

No, Rural Development does not require medical collections be paid and can be omitted.

Are non-medical collections required to be paid?

If aggregate is over $2,000, need to downgrade to a manual if GUS approval. Can get repayment plan agreement if already in one and use that payment for qualifying. If no agreement is in place use 5% of the outstanding balance as a payment for DTI calculation.

Can installment loans be omitted with less than 10 payments remaining?

If the monthly payment does not exceed five percent of the monthly repayment income, the debt may be excluded. 

Does co-signed obligations have to be considered in debt ratio?

Co-signed obligations must be considered in the total debt ratio unless the applicant provides evidence another obligor has made the payment on time for the previous 12 months prior to loan application. 

Does the payment on an authorized user account need to be included as a liability?

If the applicant is solely an authorized user and has no legal liability to repay the debt, it may be omitted. 

Do 401k loans need to be counted as a liability?

No, loans pledging personal assets, such as a 401k account, retirement funds, savings accounts, etc. do not require a payment to be included in the monthly debts. 

What are the rules if there has been a previous bankruptcy, deed in lieu or short sale?

Must be 36 months since from the credit event. It can be less with an extenuating circumstance temporary in nature beyond the borrower's control. Examples include but not limited to: Temporary loss of employment, illness, divorce, etc.

Income

What income determines if the household is eligible for a guaranteed loan?

There are two income calculations.

1) Annual Adjusted Income

This is calculated by using the gross household income for the past 12 months, not just the applicants on the note (including all eligible gross income with bonuses, commission, overtime) minus eligible deductions below.  A 4506-T/4506-C is required to be filled out and signed for each household member.

Eligible Deductions

• Dependents
• Childcare
• Elderly Care
• Care of Household with Disabilities
• Medical Expenses 

2) Repayment Income

Repayment income will determine if applicants have sufficient income to repay the mortgage in addition to recurring debts. Repayment income calculations often differ from the calculation of annual and adjusted annual income. Repayment income is the stable and dependable income of the applicants who will be parties to the note. 

Can non-taxable income such as social security be grossed up?

Yes, income that is not subject to federal taxes may be grossed up 25%

What is required for job history to qualify?

A one-year history is required. It can be met through a combination of employers, education or military service.