USDA - A Legitimate 100% Loan Program - From an Underwriter's Perspective

With the tightening of lender guidelines and the shrinking of pocketbooks across America, USDA is growing in popularity among middle to low-income families and individuals. However, very few Mortgage Professionals know how valuable this program is and, even more importantly, don't know how to structure the loan for a fast and smooth review.

Because program literature and copy written material often provides "Program Highlights" and don't get into the nitty-gritty, I called my local USDA contact and asked for a copy of the underwriting guidelines. He was happy to oblige, and I have (while trying to be more in depth than program fliers and handouts, but not dictate the underwriting guidelines - 24 pages of SMALL font that will bore you to tears) provided you with information I think you will find valuable.

Availability
USDA loans are not available in all areas. CLICK HERE to see if they are available where you are.

Term
30 year amortization, fixed rate = no exceptions. Primary residences only.

Interest Rate
Schedule provided by investors. Limited to Fannie Mae 90-day yield for 30 yr conventional fixed rate loans (plus 0.6% or 60 bps) or the lender's posted VA rate with no discount - whichever is HIGHER.

Mortgage Insurance
None - 2% guarantee fee (see below)

Guarantee Fee
2% - the maximum loan-to-value for purchase loans can exceed the appraised value to include the amount of the guarantee fee. This applies only to loans for which the guarantee fee is being financed.

Loan Purposes

• Existing or new homes, modular, manufactured (only new units), townhomes, condos. If the townhome or condo has a PUD, it is automatically acceptable for the program.
• Take out/end loan including construction-to-perm.
• Property repairs/improvements - must be completed before the final guarantee is issued.
• All typical buyer closing costs, including the one time RD guarantee fee.

Minimum or Maximum loan amount
None

Payment Shock
Do not allow additional risk layering with very strong documented compensating factors when the new PITI is double or more than their existing housing expense, or where there is no history of housing expense.

Credit Criteria

• No foreclosure in past 36 months.
• No bankruptcy discharged within 36 months.
• No more than one-payment 30 days past due in last 12 months.
• No accounts converted to collections within past 12 months.
• No tax liens or delinquent government debts (including student loans).
• No judgments outstanding in past 12 months.
• No outstanding collections.
• No two or more late rent payments within 24 months.
• No debts written off or charged off within the past 36 months.
• Chapter 13 Bankruptcies will be handled on a case-by-case basis.

Exceptions to Credit Requirements

• The circumstances were of a temporary nature, were beyond the applicant's control and have been removed.
• The adverse action or delinquency was the result of a justifiable dispute because of defective goods or services.

Streamlined Underwriting and Additional Compensating Factors
Primary wage earning is 660 or above AND co-applicant (if any) is 620 or above:

• Payment Shock - may use credit scores with no further documentation
• Ratio/Credit Waiver - may use credit scores with no further documentation
• Rental History - may use credit scores with no further documentation
• Non-Federal Outstanding Collection accounts - may use credit scores with no further documentation

Credit scores between 620 and 659

• Credit scores CANNOT be used as compensating factor.
• Adverse credit must be addressed and documented with compensating factors other than credit scores alone.

Credit scores under 620

• Requires full underwriting analysis.

Non-traditional Credit
Allowed

Debt-to-Income
29% front/ 41% back

Income Limits
The adjusted gross annual household income must not exceed the limits posted for your state. However, I have included the income limitations for Idaho as an example to you. The numbers below are for all counties in Idaho except Blaine County:

1 person - $49,550
2 person - $56,600
3 person - $63,700
4 person - $70,750
5 person - $76,400
6 person - $82,050
7 person - $87,750
8 person - $93,400 *revised 3/19/2008

Homebuyer education
Required for first time homebuyers

I hope you have found this to be helpful. If you wish to get a copy of the comprehensive guidelines, please visit the USDA website.

Happy originating!