USDA-RHS Loan and the Approval Process

Gerry Nicodemus
Nov 1, 2017 · 5 min read
Image for post
Image for post
Popularly known as RHS, the Rural Housing Service is a government agency under the United States Department of Agriculture. The agency offers a loan program to borrowers or persons that are looking to finance the purchase of a home. The loan program provided by the RHS is what is popularly called the USDA or RHS loan.

The primary responsibility of the Rural Housing Service as to regards mortgage loans is to offer guaranteed mortgage loans. However, this does not necessarily mean that every person that applies is assured of getting one of the mortgage loans. The guaranteed mortgage only implies that the Rural Housing Service will guarantee loans for persons that get a loan from a traditional lending institution. Consequently, the Rural Housing Service will step forward and repay the lending institution in case the borrower defaults on loan repayment.

Approval for RHS loan

One of the most significant benefits of the RHS loan program that has made it increasingly popular is that it helps some categories of people to get approved for their loans. The government or a government agency standing as the guarantor for a loan helps to increase the likelihood of getting a home. This is particularly true for people with marginal credit or a relatively low income. The chances of getting approved for a loan are significantly higher with the USDA-RHS loan due to the backing from the government. This is true when compared with what is obtainable with a traditional loan arrangement.

With the government guaranteeing the loan, there are specific requirements to meet to benefit from the loan program. One of such conditions is that applicants must have an income of below 115 percent of the area median income where they are looking to buy.

The borrowers are not required to make a down payment on the house they intend to purchase. However, borrowers must be able to afford the monthly mortgage payment. This is in addition to the proposed property taxes and the insurance on the house. While people with not so good credit can apply for the loan, it is part of the requirement to have a decent credit rating.

Applying for USDA Loan

The application process for an RHS loan is in two parts. The first part of the process is to qualify and get approved through any of the several lending institutions approved by the agency. This is followed by submitting a wholly underwritten file to USDA for the guarantee program. The lender processes and underwrites the loan per the USDA guidelines then sends the whole loan package to the Rural Housing Development Authority on behalf of the borrower.

Qualifying for the loan

Credit, income, and asset always constitute a mortgage loan. The USDA Guarantee loan program is not any different. A borrower’s middle-FICO score of 620-640 is the minimum credit score requirement. The other factor that determines qualification or eligibility for the USDA loan program is the income ceiling. Once it has been verified that the borrower’s income falls within the range for the loan program, the other guidelines or requirements are put forward.

One of such guidelines is that the mortgage is not to be used for the purchase of a second home or rental home. Also, the loan is not meant for the purchase of any income generating property. The proposed property must be located within the USDA eligible area map.
Other factors to be considered

One of the factors that should also be considered is that the borrower can come with no money out of pocket at closing. The costs associated with the loan can come as concessions from the seller to cover all the borrower’s closing costs and prepaid items, which are taxes and insurance in reserve.

It is also required for the borrower to live in the house as a primary residence once they close on the mortgage loan.

An RHS loan can be used in purchasing a new home or an existing one. Borrowers can also incorporate the cost of repairs to the property in the loan amount.

Direct Loans

The RHS also engages in direct loans in certain situations. This only means that borrowers would not be required to apply through a traditional lending institution to get the loan. In this case, borrowers will be working directly with the USDA to get a loan. Borrowers can go to any USDA regional office near them to apply for a mortgage. However, this program is reserved for those whose household income is less than 80 percent of the area median income or AMI where they are buying the property. The program is designed for the low-to-moderate income people that need some help finance the purchase of a property and is ineligible for other types of home loan programs.

The USDA-RHS loan is one of the most stringent and not the most accessible home loans available out there due to its 100% financing nature. It is advised that prospective home buyers explore the full financing option before going for more expensive alternatives.
Benefits of RHS Loan Program

The benefits of RHS loan program cannot be overemphasized. One of the most prominent benefits of the program is the 100 percent financing feature. However, 100 percent financing is just one of the many benefits of the program. This is particularly true considering the climate of the real estate sector.

It is known that banks attempt to sell their foreclosed properties as quickly as possible. Therefore, this provides an excellent opportunity for prospective home buyers, allowing them to buy homes below the market value. First-time home buyers will mainly find RHS home loans attractive, thanks to the full 100% financing and low-interest rates.

While 100 percent financing is one of the features of the loan program, this means 100 percent of the purchase price. The guidelines also show that homebuyers can borrow as much as 102% of the estimated amount, including the 2 percent guarantee fee paid to the USDA. This allows home buyers to keep their savings and provide some form of financial security. Other benefits include flexible credit guidelines and no Monthly Mortgage Insurance Premium.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch

Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore

Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store