Using USDA mortgages in New London County, Connecticut to get your $8000 tax credit

102 days.

That's all the time that is left to take advantage of the unprecendented opportunity the first-time homebuyer tax credit represents. With that in mind, it's more important than ever to understand the expectations one should have going into the home buying process, especially when using government financing programs, such as the USDA Guaranteed Rural Housing program. This program is perfect for home buyers whose income has prevented them from saving for a big down payment, however, if you aren't adequately prepared starting the process, you may be unable to close on time. The program provides 100% financing for homes priced up to $280,600. Here's where to start.

Your Income

The USDA mortgage program is income restricted. This means that if you earn too much money, you may not be eligible for the program. The idea behind this restriction is that families earning more should be able to save for a down payment on a conventional or FHA mortgage, and do no require the extra assistance available with the USDA program. In New London county, family income is limited to $95,450 for families with 1-4 household members, and to $126,000 for families with 5-8 members, however, there is more to these figures than you might think.

First, the USDA program looks at the income of all household members, not just those who will be borrowers on the loan. I recently looked at a sceario where a husband and wife wished to purchase a home together, but the wife was ineligible to be a borrower due to a recent chapter 7 bankruptcy. For other mortgage programs, I wouldn't even ask for her income documentation, but because we were considering a USDA mortgage, I had to. The guaranteed rural housing program uses the income of all household members to determine program eligibility, but looks only at the borrower's income for mortgage qualification and for debt-to-income ratios. One of my colleagues recently had to change a loan from USDA to FHA when the borrower got married (surprise!) during the process, thereby increasing her household income beyond the area limit.

There is a brighter side to this income limit, too. USDA does offer several exemptions to this limit, meaning that borrowers can reduce their income for qualifying purposes in some instances. Borrowers with children, and specifically, with childcare expenses, can deduct those expenses from income when calculating qualifying income.

Your Savings

USDA mortgages offer 0% down payment financing because they are specifically designed with low-income buyers in mind. This means that they look very closely at availability of funds in savings, and they expect a full disclosure of those amounts. It also means that those buyers who have accumulated money in savings may not be allowed to use the USDA program. For this purpose, money in checking, savings, CDs and money market accounts is considered available for down payment. Money in IRAs, 401(k)s and other retirement accounts is usually not considered. If you have more than 5% of the purchase price of the home in savings, you may be asked to make a down payment or forced to use a different loan program, like FHA.

That said, just because this is a 100% financing program reserved for buyers with little savings doesn't mean you can buy a home with NO money whatsoever. Even if you get a seller concession for closing costs, or if the home appraises higher than the purchase price and you roll closing costs into the loan, you will still need money for a home inspection, appraisal, and your first year's homeowner's insurance. Also, bear in mind that few sellers will take their homes off of the market for you without a deposit, so you will need money in that regard, too. At a minimum, you should have at least $2-3000 set aside before starting the process.

The Home You Buy

Beyond your qualifications, the property you purchase must also be qualified. USDA financing limits properties based on their location, their condition, and their type. One relief with USDA mortgages is that they are exempt from the Home Valuation Code of Conduct (HVCC) that is causing so many challenges for other mortgage types.

In New London County, much of the county is eligible for USDA financing, however several are not. The USDA Guaranteed Rural Housing program is intended to support ownership of properties in more rural areas, hence its name. With this intent in mind, USDA restricts the program from use in Norwich, Taftville, New London, Groton, Stonington, and a few other communities in New London County. Unfortunately, if you're hoping to purchase in one of these communities, you will have to select another loan option.

Properties purchased with USDA guaranteed funds, must also provide a safe housing option for their purchasers. Properties in disrepair are generally ineligible for funancing with USDA guaranteed funds, as are properties with external environmental concerns, such as proximity to a gas station, a chemical plant, or high tension wires, for example. Help is available for some properties needing repairs, though, as it is possible to borrow extra money to repair concerns, so long as the property is worth at least the amount of money borrowed. Properties with peeling paint, plumbing or heating repairs, or other updates needed may still qualify if a plan is presented to address the problems.

USDA financing is also limited based on property type. The Guaranteed Rural Housing program may only be used to purchase single family homes and condominiums. USDA does offer financing for 2-, 3- and 4-family homes through its Direct financing program administrered by its Norwich office.

Finding the Right Loan

Ultimately, the USDA mortgage program is a very safe program with provides excellent opportunities for many buyers, but it isn't for everyone. It's credit history requirements are comparable to FHA requirements, meaning that buyers unqualified for FHA financing due to poor credit history will also be unable to get USDA financing. For the right buyer, though, it presents a great oportunity to get a home now and take advantage of the unprecedented opportunity represented by the $8000 tax credit.

It is important to remember that the clock is ticking. Bearing in mind that it takes between 30-45 days to close a mortgage, and an additional 30-45 days or more to find the right house, there is no time like NOW to get the process started by setting an appointment with your mortgage advisor. If you haven't started already, you have very little time left!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and can be reached by commenting on this post, or by phone at (401) 263-8655. Dan also serves as an Adjunct Professor of Finance at Roger Williams University and the University of New Haven.