USDA Loan

PurpleBookmark · March 2016

DH and I have been looking at possibly purchasing a home in the next few years. I had previously posted about our rent vs. buy quandary and we're leaning towards buy at this point since we're looking for a forever home.

In our research on the home buying process we found out that our income qualifies us for a USDA loan and the entire area that we were looking at house hunting in is USDA eligible. From our research it looks like it is a 0% down loan program for middle/lower income people to encourage home ownership in rural or low population areas. The interest rates and terms are supposedly similar to the FHA program. We have been saving and have an emergency fund as well as 5% for closing costs saved (I read to budget 3-5% of sales price for closing costs).

Do you think a 0% down loan is pretty much always a bad idea, even if it's a government program? It seems like a good match for us but I also am wondering if it's too good to be true. Thoughts?

ETA We are looking at the guaranteed USDA loan, not direct : )

Xstatic3333 · March 2016

To me, a 0% loan would be pretty scary under any circumstances. The main reason is that if someone in the family got, for example, an amazing job offer soon after purchasing the home, you would almost certainly be unable to sell your home to take advantage of it for quite a few years. I'm definitely not in the "must have 20% camp," but I wouldn't be comfortable with 0%. We only put 5% down ourselves.

We looked a bit into USDA loans when we were still considering moving to the country. They do seem to have some advantages beyond the 0% down component. PMI is often lower than FHA or conventional loans, although I can't remember if it drops off automatically like on a conventional loan. That's definitely something to think about. In our area, rates were better on the USDA loans as well. I might ask your lender if you are allowed to take out a USDA loan but put some money down anyway.

I have a friend who did take a USDA loan with 0% down. She's actually in the situation that scares me; she'd like to sell her home to be closer to work but can't for a few years. Other than that, the loan is working for her just as promised.

bmo88 · March 2016

I think the answer depends.

If you put 0% down, do you have to have PMI? Or is it waived because of the special program.
Can you still afford the home? Just because it is 0% doesn't mean you can afford it, so make sure you are staying within your budget.
I would suggest putting something down though because it will still save you money in the long run. Whatever you finance, you will pay interest on. If you can afford to put some down, you save that money.

julieanne912 · March 2016

As others have mentioned, the worst part of a 0% down loan is you're kind of stuck with it for awhile.

But, an advantage is that it keeps your monthly payment low, which can be helpful if you're in a job with variable income. I know I had a 0% down loan back when they were the "thing", and in my busy months at work, when I was earning a lot of bonuses, I would pay extra on it. But in the months where my income was lower, I would just pay the minimum.

So, you just have to evaluate your needs/plans. If the reason you're doing the 0 down loan is because you have no money and can barely afford the payment, then probably not a great idea. But if you're just doing it to save your cash and can comfortably afford the payment, or preferably even more, then it's not such a bad plan if it's available. Also if you have plans to switch jobs in a few years, not such a great idea either as it may require you to move. But if you're pretty settled in an area, well, not so bad.

short+sassy · March 2016

I don't personally have experience with USDA loans, but my "office roommate" has one.

He was originally going to put 5% down, but there was something weird (don't remember exactly) where putting a down payment would have raised his interest rate a little or he would have incurred an extra fee...something like that. So his banker recommended he not make a down payment. He ended up using some of that down payment to buy items for the house but he did the smart thing with most of it. He waited about six months after closing and than just made a large principal payment on the loan, since that is what the money had essentially been intended for anyway.

He does have to pay PMI. With FHA loans, PMI is now for the life of the loan. I don't know if that is true with USDA loans.

Also, check out houses for sale on the HUD website. They are foreclosures, but there are some crazy good deals on there. Or at least there are in my area. There are two houses right now in my area that are in great condition, less than half their comps, and I'm chomping at the bit to buy them...except they are only available for owner occupants to put a bid on at the moment, not investors. I am always eating my heart out like that when I go to that site, lol.

MommyLiberty5013 · March 2016

PMI for a life of a 20 or 30 year mortgage loan is insane. They will say you can always refinance your mortgage to a conventional to get out of the PMI, but if you don't have enough equity in the home, because you put only 0% or 5% down, then you will have to wait a long time to re-fi. In the meantime, rates will likely only go up in the years ahead. And/or, your own financial situation may change and you may not be eligible due to credit or income to qualify for a re-fi.

The ONLY way I would ever consider a FDA or USDA loan is if it had NO PMI. And, even still I would make a down payment. Whatever you put down up front, cuts down on the overall cost of the loan over its life. You can see this play out using a free online mortgage calculator. Depending on the loan amount, we're talking tens MAYBE even hundreds of thousands of dollars of savings by making a down payment.

short+sassy · March 2016

I think PMIs can also be rolled into the front of the loan, rather than paying monthly for an eternity. Plus there is a substantial savings for doing that.

Conventional loans usually only require a 5% down payment and PMI is only for the first 10 years of the loan.

Of course, better yet is a 20% down payment so PMI isn't necessary, but I'm not preachy about that.

PurpleBookmark · March 2016

short+sassy said:

I don't personally have experience with USDA loans, but my "office roommate" has one.
He was originally going to put 5% down, but there was something weird (don't remember exactly) where putting a down payment would have raised his interest rate a little or he would have incurred an extra fee...something like that. So his banker recommended he not make a down payment. He ended up using some of that down payment to buy items for the house but he did the smart thing with most of it. He waited about six months after closing and than just made a large principal payment on the loan, since that is what the money had essentially been intended for anyway.
He does have to pay PMI. With FHA loans, PMI is now for the life of the loan. I don't know if that is true with USDA loans.
Also, check out houses for sale on the HUD website. They are foreclosures, but there are some crazy good deals on there. Or at least there are in my area. There are two houses right now in my area that are in great condition, less than half their comps, and I'm chomping at the bit to buy them...except they are only available for owner occupants to put a bid on at the moment, not investors. I am always eating my heart out like that when I go to that site, lol.

Thank you everyone for the input! I like the idea of the extra principal payment if for some reason a down payment is discouraged. I know PMI isn't ideal and I'll have to find out if it's for the life of the loan like FHA.

We'll probably wait regardless to buy, so chances are we'll have a (hopefully) good down payment but it's nice to have an extra option if the terms/interest rate are maybe better.

abrewer5 · March 2016

I have a USDA loan and the PMI is MUCH cheaper than on an FHA loan. We bought our house for $183500 and we pay $700 a year in PMI on the USDA loan. It's really not much at all... and much cheaper than an FHA loan which was around $200-250 per month. Not sure when it drops off because this house has always been a starter home for us so we plan to sell in a few years.

Not saying this is the best plan for everyone, but don't let the PMI scare you into not looking at this program. Most companies can also give you an idea of what it will be when you start looking at homes and do a cost comparison between the different programs. That was really helpful for us.

PurpleBookmark · March 2016

abrewer5 said:

I have a USDA loan and the PMI is MUCH cheaper than on an FHA loan. We bought our house for $183500 and we pay $700 a year in PMI on the USDA loan. It's really not much at all... and much cheaper than an FHA loan which was around $200-250 per month. Not sure when it drops off because this house has always been a starter home for us so we plan to sell in a few years.
Not saying this is the best plan for everyone, but don't let the PMI scare you into not looking at this program. Most companies can also give you an idea of what it will be when you start looking at homes and do a cost comparison between the different programs. That was really helpful for us.

That's great to hear! I'm glad the PMI isn't too high - our budget is more like $100-110k, maybe I'll have to contact a mortgage broker to get more specifics.

Xstatic3333 · March 2016

One other thing to consider: if you're able to get a DP together for a 5% conventional loan, which is more commonly available in some areas than others, you may find your offers are more competitive than if you use USDA or FHA, just because government loans can be more complicated to close. This is probably more of an issue if you're in a competitive market. We went with this option, since in my area those of us looking at starter homes are often going up against all-cash investors. Our PMI will drop off after only 4 years, and our total housing cost is still much cheaper than renting. Sorry for no paragraphs. Mobile.

brij2006 · March 2016

Xstatic3333 said:

One other thing to consider: if you're able to get a DP together for a 5% conventional loan, which is more commonly available in some areas than others, you may find your offers are more competitive than if you use USDA or FHA, just because government loans can be more complicated to close. This is probably more of an issue if you're in a competitive market. We went with this option, since in my area those of us looking at starter homes are often going up against all-cash investors. Our PMI will drop off after only 4 years, and our total housing cost is still much cheaper than renting. Sorry for no paragraphs. Mobile.

Bolded.
We live in a lcol rural area. FHA and USDA loans are common around here. Especially with first time home buyers. I can't even tell you how many sellers decline an offer because working with these loans is a royal pain and a mess. We had a conventional loan and the other offer on our house had a USDA loan and offered $7k more. The seller took our offer because our loan was better.

We sold my brothers' house to a buyer with a USDA loan. He ended up having to pay $2,000 more for the house because the laundry list of stupid crap the USDA appraiser came back with, was not things that needed to be done if he had a conventional loan. Only reason we accepted his offer using the USDA loan was because we knew him personally.

julieanne912 · March 2016

brij2006 said:

Xstatic3333 said:

One other thing to consider: if you're able to get a DP together for a 5% conventional loan, which is more commonly available in some areas than others, you may find your offers are more competitive than if you use USDA or FHA, just because government loans can be more complicated to close. This is probably more of an issue if you're in a competitive market. We went with this option, since in my area those of us looking at starter homes are often going up against all-cash investors. Our PMI will drop off after only 4 years, and our total housing cost is still much cheaper than renting. Sorry for no paragraphs. Mobile.

Bolded.
We live in a lcol rural area. FHA and USDA loans are common around here. Especially with first time home buyers. I can't even tell you how many sellers decline an offer because working with these loans is a royal pain and a mess. We had a conventional loan and the other offer on our house had a USDA loan and offered $7k more. The seller took our offer because our loan was better.
We sold my brothers' house to a buyer with a USDA loan. He ended up having to pay $2,000 more for the house because the laundry list of stupid crap the USDA appraiser came back with, was not things that needed to be done if he had a conventional loan. Only reason we accepted his offer using the USDA loan was because we knew him personally.

Yes all of this. When I worked selling REOs (foreclosures), we had a lot of properties in USDA qualifying areas. But if we ended up with multiple offers on one of them, if someone had USDA we'd have to let the asset manager know if we thought it would pass their rigorous inspections, and sometimes the asset manager would pass on a USDA offer. However if the home was in good shape (ie it was one they had repaired prior to listing), they'd go for it if it was the best offer.

FHA used to have the crazy inspections also, now they just worry about major issues and lead paint.

short+sassy · March 2016

julieanne912 said:

brij2006 said:

Xstatic3333 said:

One other thing to consider: if you're able to get a DP together for a 5% conventional loan, which is more commonly available in some areas than others, you may find your offers are more competitive than if you use USDA or FHA, just because government loans can be more complicated to close. This is probably more of an issue if you're in a competitive market. We went with this option, since in my area those of us looking at starter homes are often going up against all-cash investors. Our PMI will drop off after only 4 years, and our total housing cost is still much cheaper than renting. Sorry for no paragraphs. Mobile.

Bolded.
We live in a lcol rural area. FHA and USDA loans are common around here. Especially with first time home buyers. I can't even tell you how many sellers decline an offer because working with these loans is a royal pain and a mess. We had a conventional loan and the other offer on our house had a USDA loan and offered $7k more. The seller took our offer because our loan was better.
We sold my brothers' house to a buyer with a USDA loan. He ended up having to pay $2,000 more for the house because the laundry list of stupid crap the USDA appraiser came back with, was not things that needed to be done if he had a conventional loan. Only reason we accepted his offer using the USDA loan was because we knew him personally.

Yes all of this. When I worked selling REOs (foreclosures), we had a lot of properties in USDA qualifying areas. But if we ended up with multiple offers on one of them, if someone had USDA we'd have to let the asset manager know if we thought it would pass their rigorous inspections, and sometimes the asset manager would pass on a USDA offer. However if the home was in good shape (ie it was one they had repaired prior to listing), they'd go for it if it was the best offer.

FHA used to have the crazy inspections also, now they just worry about major issues and lead paint.

SITB
That's interesting to hear! When I was looking for my first home, I'd heard horror stories about FHA inspections. Like houses being declined if a few outlet covers were missing. I just went with a conventional loan to not have to deal with that drama...but then I also had a 20% down payment, so there wouldn't have been much point to go with an FHA loan anyway.

Previous tenants I had are living in the U.S. permanently, but are French citizens. Because of that, banks would only offer FHA loans to them. They almost had their house deal blow up because a number of repairs were required after the FHA inspection and the seller was very reticent about doing them, but did finally acquiesce.

PurpleBookmark · March 2016

That totally makes sense, I've heard the FHA inspections can be tricky. We had a friend that had to pay to add a railing to a staircase prior to closing.

If you all don't mind me asking a bunch of questions, DH and I also realized something yesterday - if we are intent on waiting a few years to buy a home we could possibly use the money saved so far to pay off our car loans. We would be debt free but we'd be back at square one for home savings. It would free up like $220 a month which for us would be huge. I'm assuming our credit score would take a hit though as we'd be left with one credit card (paid off monthly) and that's it.

Debt free would be pretty awesome but we do 100% need a bigger place in the next 4 years or so (3 kids currently share a room - yikes lol!). I guess yet one more thing to consider.

brij2006 · March 2016

PurpleBookmark said:

That totally makes sense, I've heard the FHA inspections can be tricky. We had a friend that had to pay to add a railing to a staircase prior to closing.

If you all don't mind me asking a bunch of questions, DH and I also realized something yesterday - if we are intent on waiting a few years to buy a home we could possibly use the money saved so far to pay off our car loans. We would be debt free but we'd be back at square one for home savings. It would free up like $220 a month which for us would be huge. I'm assuming our credit score would take a hit though as we'd be left with one credit card (paid off monthly) and that's it.

Debt free would be pretty awesome but we do 100% need a bigger place in the next 4 years or so (3 kids currently share a room - yikes lol!). I guess yet one more thing to consider.

I'm pretty anti-debt, so I'm going to say yes use the money to pay off the car. The thing is, when you have debt and own a house, you're just inviting Murphy to move in. Things can and will go wrong with a house. Plain and simple. There will be repairs needed, things will break, roofs will leak. It's just part of homeownership. But if you have a much larger cash flow (and a solid emergency fund), then those items seem like little bumps in the road rather than huge mountains to tackle.

I know I'm in the minority on this here, and people have definitely had good luck owning a house while still having debt. But it just makes the picture different.

Also, with that free'd up cash flow, you can focus it on saving up a larger down payment and then hopefully have the ability to avoid one of these types of loans and/or PMI. Which in the end, will save you even more money.

As for the credit score, it shouldn't ding it too bad since you will still have the credit card. It also may help with the mortgage because then your debt to income ratio is lower. That definitely doesn't hurt.

As for the kids sharing a room, the good thing about kids is they know what they have. So they don't know any different besides sharing a room.

short+sassy · March 2016

PurpleBookmark said:

That totally makes sense, I've heard the FHA inspections can be tricky. We had a friend that had to pay to add a railing to a staircase prior to closing.

If you all don't mind me asking a bunch of questions, DH and I also realized something yesterday - if we are intent on waiting a few years to buy a home we could possibly use the money saved so far to pay off our car loans. We would be debt free but we'd be back at square one for home savings. It would free up like $220 a month which for us would be huge. I'm assuming our credit score would take a hit though as we'd be left with one credit card (paid off monthly) and that's it.

Debt free would be pretty awesome but we do 100% need a bigger place in the next 4 years or so (3 kids currently share a room - yikes lol!). I guess yet one more thing to consider.

SITB
I did the math. If you took that same $220/month payment and used it exclusively toward replenishing your savings for a down payment, you'd save $10,560 over the next 48 months (4 years). Does that make you better/worse off? Would you all be disciplined enough to do that with the extra money in the budget?

Your credit score and history would take a hit, but I'm not sure it would be that big of one. One thing that affects credit scores is having a "mix" of credit types. But this is usually a low impact factor.

I don't know if this is important to you, but no longer having a $220/month payment would HUGELY effect what you qualify for, because it would greatly improve your debt to income ratio. However, that would be true whether that monthly payment drops off now or drops off even just a couple months before you get a pre-approval from your lender.

Just as an example, my car got totaled right when I was first shopping for my personal home. I was freaking out about how that would affect my ability to purchase a home if I got a new car loan. My banker calmed me down and told me, as long as my new car loan had the same or smaller payment to my previous car loan, it wouldn't matter at all. As it turned out, my new payment was $100 less than my previous payment. My preapproval got "reran". Just that $100 monthly difference in my bills, raised my preapproval amount by $30K. I was absolutely (but pleasantly) shocked, lol.

julieanne912 · March 2016

FHA may care about outlet covers being missing, because it's actually kind of a safety hazard. I've not seen that called out in an appraisal in a long time though.

The main things I've seen called out for FHA in recent years were flaking paint anywhere on the house if it's built prior to 1978 and if there missing/non-working smoke detectors and carbon monoxide detectors. I've seen VA appraisers call out things like tripping hazards, so like if the carpet is bunched up or the threshhold sticks out too much, or if there are hand rails missing on stairs. It kind of just depends on the appraiser.

That being said, they don't "reject" the house. They just give list of repairs and you can either ask the seller to fix them, or fix them yourself with the seller's permission. They then have to come out and re-inspect (for a fee).

I had some FHA clients who purchased a beautiful old Chicago bungalow (still had the original stained glass in the front windows!), but it had flaking paint on the wood storm windows. It was an as-is sale by an estate, so they weren't going to fix anything. But, they agreed to let me and the buyer go over there and spend the day taking them down and scraping them and repainting, so that's what we did. We did this before the appraiser came, to avoid a reinspect fee. The house passed.

PurpleBookmark · April 2016

short+sassy said:

PurpleBookmark said:

That totally makes sense, I've heard the FHA inspections can be tricky. We had a friend that had to pay to add a railing to a staircase prior to closing.

If you all don't mind me asking a bunch of questions, DH and I also realized something yesterday - if we are intent on waiting a few years to buy a home we could possibly use the money saved so far to pay off our car loans. We would be debt free but we'd be back at square one for home savings. It would free up like $220 a month which for us would be huge. I'm assuming our credit score would take a hit though as we'd be left with one credit card (paid off monthly) and that's it.

Debt free would be pretty awesome but we do 100% need a bigger place in the next 4 years or so (3 kids currently share a room - yikes lol!). I guess yet one more thing to consider.

SITB
I did the math. If you took that same $220/month payment and used it exclusively toward replenishing your savings for a down payment, you'd save $10,560 over the next 48 months (4 years). Does that make you better/worse off? Would you all be disciplined enough to do that with the extra money in the budget?

Your credit score and history would take a hit, but I'm not sure it would be that big of one. One thing that affects credit scores is having a "mix" of credit types. But this is usually a low impact factor.

I don't know if this is important to you, but no longer having a $220/month payment would HUGELY effect what you qualify for, because it would greatly improve your debt to income ratio. However, that would be true whether that monthly payment drops off now or drops off even just a couple months before you get a pre-approval from your lender.

Just as an example, my car got totaled right when I was first shopping for my personal home. I was freaking out about how that would affect my ability to purchase a home if I got a new car loan. My banker calmed me down and told me, as long as my new car loan had the same or smaller payment to my previous car loan, it wouldn't matter at all. As it turned out, my new payment was $100 less than my previous payment. My preapproval got "reran". Just that $100 monthly difference in my bills, raised my preapproval amount by $30K. I was absolutely (but pleasantly) shocked, lol.

The savings would definitely be better off I believe - we are mainly using tax returns now so I think that would add even more money even with depleting what we have now to pay off debt.

A higher pre approval would be nice although I know we would like to shrink our monthly expenses from their current level if at all possible. I think our budget will probably need to be raised though as I'm guessing 100k houses now will probably be 125k or more in 4 years if the market keeps improving.

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