The USDA Home Loan Program Part 3

For this part of the update, we’ll be discussing more of what it’s like to go through the USDA loan process. While the USDA loan program is a bit more strict than other programs, especially income-wise, there are other more lenient requirements, as we’ll discuss below!

The Appraisal Report

For USDA Home Loans, the appraisal report can easily put a damper on the home loan process. Similar to FHA Loans, Appraisal Reports for USDA home loans must have fulfill a specific criteria in order for the loan to be approved on. This helps protect the borrower from a buying a home that may otherwise be dangerous to live in.

Additionally, the appraisal report also guarantees that the home is not income producing. We briefly mentioned it in part 1 of the series, but a home that is seen as potentially income-producing cannot be purchased with the USDA home loan program.

The appraiser must specifically mention whether or not a home seems to have income-producing characteristics, like a full kitchen and bathroom as well as a separate exit located in the basement. This can hint that this area can be rented out, therefore being income producing.

If the home’s appraisal value does not cause any issues, the appraiser must also confirm if the home satisfies the conditions set by The US Department of Housing and Urban Development in the most recent HUD Handbook. If the verbiage is not on the report, the underwriter will reject the appraisal until that information is there. If a home does not fulfill the conditions, the appraiser must list the repairs needed, and a completion report must be completed showing that the aforementioned repairs have been completed.

Homeowner’s Insurance Requirements for the USDA Loan Program

The Homeowner’s Insurance requirements for the USDA program indicates that in order for the loan to be able to be closed, the policy must have the following items:

• Dwelling Coverage to match the loan amount.
• If it’s lower than the loan amount, the Insurance Company must provide what is called a Replacement Cost Estimator, or RCE for short. This document breaks down how the Homeowner’s Insurance Company arrived at their dwelling coverage amount. This document along with the Homeowners Insurance should be enough to clear the condition, but it is also underwriter’s discretion.
• Named Insured and Mortgagee Clause to match loan documents
• The Homeowners Insurance policy must have the insured person(s) match the person(s) on the loan.  Additionally, the Mortgagee section should have the Mortgagee Clause of the Lender, including the loan number. All of these items should match the loan documents exactly.
• Acceptable Deductible
• The deductible for USDA homeowner’s insurance policies MUST be either 1% of the dwelling coverage OR a $1000 whichever is greater.
• For example, if a policy’s dwelling coverage amount is $160,000, the deductible is allowed to exceed $1000, up to a maximum of $1600, but no greater.

An insurance binder, Evidence of Insurance, Memorandum of Insurance, or Certificate of Insurance are all acceptable documents up to closing. However, a Homeowners Insurance Declaration’s Page and Invoice must be provided at closing. This is because an Evidence of Insurance and other documents have premiums and coverage that can be changed. Due to USDA’s strict guidelines, if the premium increases past what has been previously accepted, this may render the first time home buyer ineligible for the loan due to debt-to-income ratios.