28. USDA LOAN BASICS

SUMMARY KEYWORDS

Usdan, area, people, properties, home, loan, Oregon, limit, product, buy, Portland, higher, eligible, city, conventional, down payment, far loans, evolves, rate, town

SPEAKERS

Rob, Intro, Adrian

Intro  00:02

Welcome to the get rich, slow podcast. This is the stuff we and our expert guests wish we knew a decade ago to get the most out of our financial life will provide you with insight into wealth building activities and practices that can expand your net worth exponentially. get insight from top professionals who will reveal how to build wealth the long way, work smarter, not harder and identify your financial blind spots. With over 25 plus years of experience as licensed real estate professionals and a long track record of winning for their clients. Robin Adrian will teach you what it takes to be an everyday real estate millionaire.

Adrian  00:43

Welcome back, future millionaires. This is the get rich slow podcast and I am your co-host, Adrian Shermer, I’m joined by my other co-host, Rob Delevan. Good morning, Rob.

Rob  00:53

Good morning. Glad to be here with you.

Adrian  00:55

Thank you. Thank you. Today is sort of a piggyback on our last episode about FHA loans. This one’s gonna be about USDA. So again, you’re gonna hear my lovely voice prattle on and on about how this program works, where it came from, who it’s for, and the pros and cons.

Rob  01:14

Yes. And I will say I’m, I was glad to see this on our schedule. Because USDA is actually not a product that I have worked with very often. I can probably count maybe two hands, the number of times out of you know, hundreds and hundreds of transactions that we’ve done over the years. Yeah, I’m not quite at 1000 yet, but hundreds that we just maybe half a dozen times, give or take. Sure. And I think this a product like this is a bit specialty. But hey, it’s out there for a reason. And there’s pros and cons to it just like every other financial product on the lending side. But it’s a fun one to dig into. So as usual, I’m the idiot in the room. And I will ask you questions. So, let’s start with what like what is a USDA loan? How would How does it differentiate?

Adrian  02:14

Absolutely. USDA? It’s not just a stamp on your meat at the store. It is the United States Department of Agriculture, and it might sound kooky. Why are they doing home loans? Well, that’s because they are part of an integral part of rural America, not just our farming, but all people who live in rural America and support those farming communities as well. So, it’s it’s a holistic thing. What I would ask our listeners to do if you’re interested in learning about the USDA, it sounds like it would just be for homes in the sticks. But I have literally done this on homes in coldest acts. It is location based, you can look up any address you want on the USDA property look up, you just do a Google search for that. It’s a.gov website, you enter one address, and then you’ll end up on a page that tells you whether or not that particular property is eligible. But then you can zoom out in that map, and you can move all over the place. And you can see the color-coded chart that is the entirety of the United States and which areas fall under that. And using Oregon as an example. You know, we have plenty of built-up areas and Oregon’s big cities. Pretty much just Portland Metro Salem Metro, which is our state’s capitol right away. So that’s a real dense area as well. And then I think there’s a little lump just to the east for whatever reason there. There’s that college town of Salem, that that is ineligible. The entirety of the coast. Last night checked was eligible. Most of IE, you know, on the entirety of Eastern Oregon, Southern Oregon was eligible really, they’d eligible eyes, that’s made-up word but sections of the country fairly rarely by the looks of things. And even within a big city like Portland, in our metro area, there are these pockets as well, right that are still eligible. Right. USDA allows for 100% financing. And this is questioning all the time. You guys got that zero-down loan? Yeah. It’s called the USDA loan. We’ve always had it we’ve had it for or not always. We’ve had it for a long time. This was established by the 1990 farm bill by the Rural Development Association RDA. And they were basically, you know, it’s designed in theory to buy farmland, that is one purpose of it. But the reality is, it’s a loan portfolio of over $220 billion. It’s a huge amount of the properties in this country that fall under this and probably more properties than you think. And I think that people seem to think that there is some sort of caveat there and it’s really, it’s not that punishing. It’s honestly one of the better loan programs out there. It does have mortgage insurance. It’s like a lot of loans. But the mortgage insurance rate isn’t that bad. They take 1% on at the beginning. So, your loan can this typically, the way that it works is that your loan will start at 101. Point, point one because we tack on it modifies that percent of the purchase price. So, you’re starting to feel a little bit upside down, but you’re not putting any money down. And you’re not important. This is so important to me. You’re not taking a higher rate as punishment for not having down payment, right? Like we see with some of those first-time homebuyer specialty programs that everybody asks about, and almost no one uses. There are some good ones out there. Don’t get me wrong, but there also are a ton of them that I really, I wouldn’t recommend to someone that I liked. Sure, cut I don’t think the terms workout within a year, they’re gonna get that money back out. Yeah, you know, right. no free lunch. USDA is as close as it comes to a free lunch, which is ironic, right? There we go. Some veggies, yes, there’s an overlap here.

Rob  05:58

So, the properties, we’ve established them that they’re, you know, usually on the fringes or farther out of the larger urban areas. For example, we have, you know, just up the road, you know, Newberg, Oregon, which is 2530-minute drive, well, 20-minute drive, if no traffic at you know, 11pm at night, but you know, during normal traffic times, it’s a typical commute 3540 minute, into the core of the Portland metro area for work. So that’s the USDA area. And the home prices are roughly the same, maybe a little bit less, then you know, a couple towns closer, you know, another 1015-minute commute closer, but you’re not talking about a huge difference. And it’s available and zero down, in essence, for a very, very minimal down with closing costs. And such,

Adrian  06:55

and the row are fantastic, just like they are with FHA loans. And we talked about this to this idea that if you’re paying a lower initial, you know, core interest rate, and I think it’s, it’s one way to look at it is to then add the mortgage insurance rate, because the mortgage insurance is a percentage, it skews a bit like FHA loans, they stay the same. So, it’s kind of like, you know, that rate that effective rate climbs each year, that’s why a lot of people want to roll out of those. But you know, you want to look at that whole picture, mortgage insurance and interest in my mind, same thing, it’s money that does not contribute to the equity in your home, it doesn’t pay your taxes, and it doesn’t pay your homeowners insurance. Although those arguably could be kind of thrown in the same bucket too, right, we want to drive that balance down. So, let’s use a template here, just to kind of give an example you got a $250,000 home, you got no down payment, your upfront fee is 2500 bucks, that means that you’re going to get a USDA loan for $252,500 to cover the house cost of the home and the guaranteed fee, they’re one of the rare programs that let you roll in that guaranteed fee. FHA does this as well. That’s why you don’t necessarily start with three and a half percent equity when you do buy that house. But you know, as we’ve seen, appreciation rates have you gained in equity pretty rapidly. But then there is also your mortgage insurance, it’s an annual free of point three 5% of the loan amount. So, using that 250 to 500, that’s 883 75. And you pay that over the course of the year. So, the monthly mortgage insurance on that $250,000 home is only 7365.

Rob  08:31

Right? And then you plot that on top of your interest rate. And your interest rates probably still going to be pretty darn competitive with what you’d be getting on a conventional and there was very little money out of your pocket to buy it. So, I would say like this isn’t unlike, say FHA, which will go to you know, lower credit scores, that sort of thing. This maybe has a little bit more room for that than conventional, but at the same at the at the end of the day, you’re really using this product, because you happen to be in an area that will cover it and are that that this program is allowed. Number one, and then number two more importantly, you’re you basically have almost no down payment. I mean, that’s, that’s the real draw. Are there any other scenarios that you see this used regularly versus say, you know, a conventional product?

Adrian  09:29

Yeah, it is more forgiving on the guidelines as well with farmland, of course, because this is, you know, this is a product that was used to, you know, potentially finance. So, we do see it used as well a lot in higher acreage properties, right. The one thing that we run into the most that I see disqualifying people from this is that there is a factor of qualifying based off of your income in comparison to the median income in that area. And so, this is another thing that is also a public piece. have information, you don’t have to rely on a loan officer to look into this, although I encourage you using a good one to be your sounding board and someone who may know about how to especially work loopholes and such in the system. But you typically have to be below 120% of the median income for that area. So that is one of the kinds of catch 20 twos too sometimes we see someone who wants to live in a city, they’re going to buy in a more rural area, but they got that city income. And then they go and try to buy in, in an area where it’s a, you know, a farming community that might not have as high average incomes for whatever reason, or it’s just more rural, you know, so there’s less density there doesn’t drive up the cost of goods, so it doesn’t drive out the wages necessarily. And then we see that kind of catch 22. So, as I’ve had people who would search for properties like that, I remind them you got to use, USDA provides this as well, the area median income lookup tool, and then you can see and make sure, okay, do I fall under that line? Or am I going to get caught up in underwriting? And then we’re going to have to find a different solution. Sure.

Rob  11:05

And another question for you. The, excuse me, the actual lending limits.

Adrian  11:11

Yes, and the lending limits are also county based. So, we got to go and look at the individual properties. Same thing here, when you when you use that government lookup website, for the USDA, you will find the limits for your given area. Generally, they are a little bit lower than conventional limits, a lot of the time I’ve seen but sometimes not, you just got to check the county as a county-based limit system,

Rob  11:36

right? Well, right now, the conventional limits are, you know, close to 550, that’ll be changing at the end of the year. But my understanding is they’re what 50 75k, less something like that, depending on

Adrian  11:50

where you’re at. Because I can’t because it’s metered by this specific area. It’s always kind of hard to tell. I mean, there’s counties in Oregon that I’ve seen are under 300,000. You know, that’s, that’s a huge gap. That’s a desert $250,000 gap basically, from, you know, the limit. And it’s different in different parts of the country to 85 is a really common one we see. But then that limit can be much higher, you know, let’s pick Sonoma County, Sonoma County has a limit of 763. And this is all data that makes sense, when you look at the areas, you know, they’re the average income limitation is going to effectively set the limit to the maximum purchase price, right? Right. Your debt-to-income ratio has to stay below that, that threshold, they are lower on USDA loans than other loans. So maximum ratios are, are going to be lower, and the credit score is going to be a little bit higher as well, about a 29%, front end 41% back end. So right, your payment must be no more typically than 29% of your income. And then if you include your monthly minimums on other stats and obligations 41% of your gross income.

Rob  13:11

So, this is this has, you know, especially for us, you know, in the Portland Metro has become in a really is a niche product. versus say, you know, somebody who’s operating in small town America, you know, typically, you know, 20,000 or less people in that area, are in that town, very

Adrian  13:32

high take right there. Yeah, I’ve got friends who were officers in some of the smaller towns, they 50 plus percent of the loans they do our USDA, they’re doing all the time, right. But again, you know, I’ve seen people utilize it, where they go, Okay, I really want to live in Portland. But I’m gonna step out of that metro area, I’m gonna take that longer commute, like you’re saying, because I want to learn like this area, I’m gonna buy a house, it’s, you know, a lovely house in a more quote, unquote, rural community. And that bar is shifting as the world, you know, evolves here, and some of these towns are blown up, and then I’m gonna get some equity. Ideally, I’m gonna choose something, you know, that’s kind of the neat thing. We’ve seen this before, too, right? We talked about that Bullseye outside of major cities. And, you know, we saw it with San Francisco or New York or, you know, New York’s a great one, right? Like, there’s, there’s places that were notorious for being super rough and are now just, you know, fully

Rob  14:27

transformed.

Adrian  14:28

Yeah. Transformed. Yeah. And, you know, if you want to talk about the pros and cons of, of a culture of a city evolving as the lower income areas become, you know, more valuable, that’s a whole conversation to table. But it does mean that if you bought a property for a steel in an area like that, and then development sort of washes its way out from that Metro of people who want to live close to the city like you did right. Then you can take advantage of that upturn. You can take advantage of grabbing something that’s in a suburb just over that line, and as the city’s presses its higher rate of development out around you, you can double your investment potentially.

Rob  15:07

And it’s and that’s a big piece, you know, just tying in kind of what’s happening with the socio-economic changes having to do with the pandemic over the last couple of years. There has been such an incredible flight to the suburbs, if you will, I’m sure everybody’s read you know, articles on that. But it’s not just the suburbs it’s you know, hey, my jobs in Silicon Valley but I live in Portland and 97% of the time I don’t need to be in Silicon Valley so you know, make that income at that higher area you know, based on the mean in Silicon Valley but you know, you’re just getting by in Silicon Valley by in Portland which is a cheaper market relatively speaking and you can leverage out that way then people are doing the exact same thing you know, Portland to you know, say a smaller bedroom community like McMinnville you know it’s yeah okay it’s 45 minutes away an hour away depending on traffic and such not that far you can still go in you know and get some Portland culture if you so choose on the weekend or you know when what have you but if you can work at home doesn’t matter if you’re an hour commute because you’re you know commuting from your bedroom to your office and you know more land typically more room to spread out. houses can be a little bigger and definitely lower price per square foot. So, and for

Adrian  16:27

Oregon specifically McMinnville? Actually, great example Yamhill County, Washington County, Multnomah and Columbia County Clackamas, as well. Those are the ones in our state that are at the $414,000 limit for the USDA. That’s the limit through February of 2021. Some other counties go as low as 285. That seems to be about the floor right now for most of the country. So that’s again, that’s that catch 22 You got to find out what your county limits are and see, you know, this is a product you want to work out the nuts and bolts to but boy, what a city that’s just blowing up in popularity as wine country evolves, rounded $414,000 is more than enough money to buy some great properties even down in kind of getting close to the center of town, dead center. But you know, there’s some of that feeling out there. Like we’re talking about few blocks off, you may be able to buy a really nice home, that’s going to appreciate at a fairly quick rate because that city is just experiencing some growth. It’s desirable,

Rob  17:32

Shameless, Shameless plug. Oregon, Oregon pines Oh, man, there. Yeah,

Adrian  17:37

I love that city. I’m not gonna lie. I literally even told my mom, my mom retired recently. And she said, you know, I’m looking for cool spot to settle down. And it’s a super walkable town. You know, again, this rural loan does not mean that you’re three miles from your nearest neighbor or anything by that stretch. And I think that’s one of the issues with this loan program is that the concept of what rural means to us? For USDA, we think of farmland we think of, you know, dirt roads. It actually covers a huge swath of the country does yourself a favor and look into it.

Rob  18:09

Yep. I love it. All righties. Well, hopefully we’ve dropped some knowledge on you on this USDA product. It’s, it’s right for some and probably a surprising amount of people. So, let’s, let’s all hope that from this just getting educated myself, that I’ll be able to steer my clients towards that if it’s if it’s an appropriate fit. So, love, appreciate Adrian.

Adrian  18:34

Thanks for letting me get blown here for a while Rob. Love it, listeners. We’ll catch you next week.

Rob  18:39

Okay, thank you all. Bye. Bye.

Intro  18:41

Bye. Thank you for listening to the get rich, slow podcast. If you liked what you learned, please subscribe, rate and review so we can grow wealth for even more families.