Rural Development Loans

Written By: Bonnie Wilt-Hild

When we think about government loan programs, most often the FHA and VA programs come to mind however there is another one, that being Rural Development. I know you have all heard of them but for some reason they seem to be a loan type that very few know anything about, so being in good form as I sometimes am, I thought I would share the specifics because these days, any program that a lender can offer with a maximum 100% LTV that will allow one to roll in closing costs, is a good one.

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As the third federally insured mortgage type, Rural Development offers two different types of USDA loans for the purchase of single family primary residences, those being USDA Guaranteed Rural Housing Loans and USDA Direct Rural Housing loans. The differences are this; under the USDA Guaranteed Rural Housing loans, which are the most common type of USDA loans completed, a potential borrower may purchase a home utilizing 100% financing providing their income does not exceed 115% of the median household income for the area in which they are purchasing. The USDA Direct Rural Housing loans are somewhat less common as the provide financing for low and very low income households and by this I mean income below 50 percent of the area’s median income in which the property is being purchased so with that said, income maximum’s apply under this program.

So why is a program that includes income caps advantageous your ask, well quite simply put USDA mortgage types are not totally credit score driven although borrowers must have a minimum credit score of at least 620 which is still outstanding considering as a lender you are completing 100% financing. Additionally, credit standards are similar to those of FHA allowing for certain extenuating circumstances where the borrowers prior credit performance is concerned and if it is determined that the borrower has since recovered from the extenuating circumstances that impeded their ability to make timely monthly payments in the past, loan approval is probable. Next and as stated above, USDA requires no minimum required investment so borrowers who have little or no savings fit quite nicely into the program as it also allows for seller contribution and gift funds and lastly but not least, there is no monthly mortgage insurance. USDA charges a funding fee at time of closing, very similar to VA which can be financed into the loan amount which ultimately allows for a lower monthly mortgage payment for the borrower.

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There are some things you need to consider when determining if your borrower is a candidate for a USDA loan and these things should be considered prior to originating the loan. To begin, you must determine that your ratio’s will meet program guidelines while at the same time determining that your borrowers monthly income does not exceed 115% of the area’s median income (income limits may be checked on the USDA website). Ratio guidelines as set forth under the program are 29/41 respectively.

Ratio’s waivers are allowed however in order to be eligible the borrower’s credit score must be at least 660 and other compensating factors mitigating risk must also be documented in the loan file. Next you must determine property eligibility as the program limits properties to single family homes within certain geographical locations and again, this information may be obtained on the USDA website. Property types eligible for financing include condominiums, PUDS, manufactured housing and single family residences that will be owner occupied. Credit standards must also be considered as to credit score, collections, judgments and subsequent bankruptcies. For instance a chapter 7 bankruptcy must have been discharged for at least 3 years for a potential borrower to be eligible and all cases must be run through GUS which is the USDA AUS system, and receive an Eligible rating.

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In closing I will say that the cases are not significantly different from an underwriting standpoint than any other government program so if government programs are your forte, you should enjoy this one as much as any of the others. From an origination standpoint, anything that provides more sales options in your tool box is a good thing. As always everyone, happy underwriting.


About The Author

Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University ( as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at:

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