Potential buyer has a USDA loan. What do I need to know?
Rehabber · Niantic, CT · Member since 2012 · 443 posts · 150 votes
Hey all,
We received an offer on a property today in which the buyer is using a USDA loan, a product I'm not very familiar with (but will learn). To cut to the chase, is USDA similar to a VA loan in that the buyer is essentially prohibited from putting any money down? Aside from the offer price, there's not much else that's good in this offer - buyer is putting down next to nothing for an earnest money deposit and wants 9k in closing costs, plus he hasn't specified a mortgage commitment date. Ummm, NO.
The offer just came in so we haven't replied or countered yet. I'm trying to read up on this type of loan but haven't found the specifics I'm after. In particular, I want to know whether we can require a more traditional deposit; whether USDA makes the seller pay for closing costs or whether we can negotiate that point; and how much of a stickler we can be on the date for the mortgage commitment. I would typically put in 21 days (a la @J Scott and his tips for closing success) and then they'd have to make a heckuva good case to extend from there.
I'll leave it at that for the moment. Thanks for any insight!
I bought my first house with usda last year.
Buyers can put a down payment on the property, but if they using usda then it is because they don't have money for a down payment.
Closing costs can be wrapped into the loan. The trick is that the house needs to appraise for the loan amount including the extra usda costs.
The closing itself was very quick and painless. We found the hous at the beginning of December and moved in on the 19th.
The downside is that the seller foots a larger portion of the closing costs unless the buyer has the money for it. If you can agree on closing costs then you are home free.
The bank and closing company go the extra mile to educate the usda buyer (because they have to).
I'd sell to a usda buyer if we could agree on closing costs.
With the caveat that my only experience with a USDA loan was nearly 10 years ago...
Never again. The closing took forever (through no fault of the buyer) and the inspection requirements were outrageous. I don't know if the buyer could have made a down payment, but I do know that they were not allowed to pay for (or take a concession for) repairs. I had to make them. They were not expensive, but they were ticky-tack little crap that wouldn't even have shown up on the radar of an inspector doing a standard home inspection for a conventional mortgage.
I'd only accept it as a backup offer.
Thanks, @Richard C. . I'm leaning toward that scenario. Property hasn't been listed for very long and is a good one, so I'm very ready to reject it or be especially tough in negotiations. The only saving grace is that the offer price is a decent one; I'm not so sure it's worth the headaches, however. A minor headache, maybe, but not a large one.
I bought my first house with usda last year.
Buyers can put a down payment on the property, but if they using usda then it is because they don't have money for a down payment.
Closing costs can be wrapped into the loan. The trick is that the house needs to appraise for the loan amount including the extra usda costs.
The closing itself was very quick and painless. We found the hous at the beginning of December and moved in on the 19th.
The downside is that the seller foots a larger portion of the closing costs unless the buyer has the money for it. If you can agree on closing costs then you are home free.
The bank and closing company go the extra mile to educate the usda buyer (because they have to).
I'd sell to a usda buyer if we could agree on closing costs.
Thanks, @Phillip Tillotson , that's helpful. When you say the property needs to appraise for the loan amount, including extra USDA costs, what costs are you talking about? And are there any restrictions on the amount of the deposit? This is a house at a price point (300k+) where I'd expect a buyer should be able to come up with some type of deposit.
My biggest concern is in regards to the process more than the numbers. I don't want this thing to drag out for months or for the property to be off market for 8 weeks, only to find out it falls through for some convoluted bureaucratic reason. So if I can find a way to make sure the process is pretty smooth, I'm fine with it even if it's a little more cumbersome than a traditional loan.
300k!? USDA loans can cover 100% of the loan. The possible loan amount is determined by how much you make a year. My banker told me that 75k$ a year was the cutoff. Not sure what price of home that would be. I made 40k$ when I applied and was eligible for 112k$ I'm not sure what the additional fees are called, but I know that there are extra fees. You don't need to be worried about this as it will only affect the buyers. It will be tacked onto their loan.
I pre-approved so I knew exactly what I could afford. You should check the buyer to see what he/she is pre-approved for. If they are pre-approved then it is painless. If they are just guessing then it will be painful.
Mine actually closed early. We were not supposed to move in till after Christmas. Sellers wanted to push it and everybody else was on board!
Hi Karin,
I'm new to BP and this is my first post. :-) But I am a full time Realtor and have had many clients buy / sell with USDA loans. You should go to USDA.gov to verify that your property is in a USDA eligible area. The maps were re-drawn recently and changes took effect in January.
Each 'region' has their own underwriting office. Here in central Indiana, our USDA loans can take up to 90 days to close because our regional office is always so back logged. The loan must clear local lender underwriting fully before being sent to USDA.
My guess is that your buyer has asked for such a large sum for closing costs because it can be used to offset the USDA funding fee, which, as previously mentioned, would otherwise be tacked on to his mortgage balance.
Call a local lender that you trust and ask your questions about USDA financing and how long approvals are taking in your area. Or perhaps your buyers Realtor could clear some things up for you. The USDA loan product is probably the best product out there for a no money down owner - occupy loan and, as long as the property meets USDA requirements and buyer falls within their income guidelines, you shouldn't reject just because of this loan type.
Hope this helps! Best of luck for a speedy sale!
Thanks, @Sandy Thomas ! I will definitely double-check the map, though I think it's likely considered rural enough. We're using a Realtor to sell this listing and he tells us that he checked with another agent who's been working these kinds of loans and said the turnaround, once the file is sent to USDA, is about 10 days. Hopefully that's accurate and just means we need to make sure the local mortgage broker gets things done in a timely manner.
Previously, USDA loans took a while because of the government shutdown. They then were backlogged for a while. My loan completed in a timely manner even though they were still "back logged." I expect that you'll be fine.......unless the government shuts down or you try to closing during a heavy government holiday time period.
No worries, Homeland Security has no hand in processing USDA loans!
USDA is very similar in underwriting to Fannie Mae except to loan limits so it is not as detailed as FHA or VA, appraisal requirements are not as stringent but high LTV they will be as particular.
USDA is rural development, so your area must meet population requirements as a small municipality or rural area. Excellent loan product for such areas, I brokered them.
You can also just call the USDA Extension office, ask for the lending side and get information from the horse's mouth! :)
I do many deals in rural areas where buyers utilize USDA loans and I will try to address some of the potential pitfalls from a seller's perspective :
Property Location and Buyer's income must meet the areas and guidelines provided by USDA- The Buyer's loan officer should be able to provide a pre-qualification letter stating the amount the buyer can qualify for, that the buyer is eligible for the program and that the property falls within the guidelines.
Do I have to pay all the buyer's closing costs ? No you do no. the amount you pay is negotiable. However, keep in mind that USDA is a program with income limits and many of these buyers will have little money for closing costs so will ask for their closing costs to be paid
Appraisal- In my experience, rural areas seldom have more than a couple of appraisers so they all do FHA,VA,USDA and Conv. The guidelines are similar to those of FHA and VA
Timeline- This has been my issue with USDA ! Once the lender approves the buyer, the package had to be sent to USDA for approval and in the areas I work there has been a backlog for the last 2+ years. USDA approvals have been taking 28-30 days from the time they receive the package so closings have normally taken 2-3 months. I typically call the USDA regional office directly to get an idea of the timeline.
So plan accordingly and open a dialogue with the mortgage company and USDA if this is the route you choose. Good luck and feel free to reach out if I can help
Interesting points all around, thanks. @Greg H. we do have a pre-approval letter in which it appears the broker has done some underwriting. However, it doesn't reference the USDA loan. I wonder if, in our counter, we ask that the pre-approval letter state what you've mentioned. And @Bill Gulley I like the idea about calling the local office. Consider that on our to-do list.
We were wondering about the income limits - again, this is a 300k+ house, not a first-timer thing. Either I should be concerned about a buyer not having a reasonable amount of deposit money for a property of this type, or else he's simply a guy taking advantage of a no-money-down product. We sold a house a couple of years ago for 270k to buyers who had plenty of income, but simply took advantage of a VA loan where they didn't have to spend any money out of pocket.
Income limits? Conventional ratios, the loan limits vary by region and area, higher in Cali for example than in my county. Just call them, they can answer all your questions, ask for a loan officer. They may not give loan details as to a borrower, but in general they will explain the programs and who, what, when, where and why's of your concerns. Good luck :)
Everyone has given you great advice so far :)
From my experience, USDA turnaround is not too bad depending on the area and also how "on the ball" your buyer and his lender is.
If your buyer is asking you to pay what sounds like all of the closing costs, and going USDA, I would say there's a pretty good chance they have no money to come to the settlement table. One thing to be aware of - their lender might require them to have enough cash to cover the closing costs, even if the seller has agreed to pay. I would be weary of this.
The USDA guarantee fee is 2%. So the house would have to appraise for 102% of your contract price in order for the buyer tack it onto the mortgage.
I would be skeptical of someone qualifying for USDA with a house in the 300k price point. There is a maximum income limit - you can go to http://eligibility.sc.egov.usda.gov/eligibility/ to get an idea of what it is for your area specifically by choosing Income Limits or Income Eligibility on the left. Guaranteed income limits are higher than direct. If someone qualifies for a 300k loan, I think it's highly likely they exceed the income limits.
I would certainly be entertaining the idea of the offer, but be cautious..
I agree with Heather. If the bank agrees with the buyer then great! However, you better double check cause that sounds too high for USDA.
Thanks again for the great input. A brief update: buyer's mortgage broker confirmed that he has been through underwriting and pretty much everything but an appraisal has been done; also, that he qualifies for the USDA program. We also spoke to someone from the regional USDA office who filled us in on some particulars of the program. Sounds like turnaround time could still be a bit of a mystery, with the biggest potential delay coming with appraisal. He did say things are slow right now, which is good for scheduling. The buyer's mortgage brokerage is an approved appraisal company for USDA and the property is indeed within the approved area. Buyer himself is not yet in the USDA system, but that's not unusual.
With that in mind, and after doing a little more homework on our own to see what we could learn regarding the buyer, it looks like he's a solid, serious buyer - with plenty of income, but apparently still within the guidelines - and so we sent along our counter. We countered on the purchase price itself, earnest money deposit, closing costs and closing date. Oh, and we made sure to add in a date for mortgage commitment, of course. :)
I believe the process is that buyer will receive an approval/commitment from the mortgage broker, who will then send the info to the USDA for their review, which is essentially a paperwork thing to formally accept him in the program. So we specified that the commitment date is USDA commitment. Our hope is that the buyer and his agent will keep on top of the local mortgage broker to get their part done asap and sent to USDA. If everything is as straightforward as it currently looks, our biggest questions would seem to be USDA expediency, what the inspections are like (I'm new enough that those always make me nervous, no matter how good the property), and the appraisal.