What is a Rural Development Loan in Michigan? A Complete Guide

A Rural Development (RD) loan is a mortgage loan program offered by the United States Department of Agriculture (USDA) to help low-to-moderate income individuals and families buy homes in rural and suburban areas. These government-backed loans have become an attractive option for homebuyers in Michigan looking for affordable financing and flexible credit requirements.

Overview of Rural Development Loans

The Rural Development loan program provides home loans to eligible homebuyers in rural and suburban neighborhoods to promote homeownership. Some key features of RD loans include:

• Available for purchase of an existing home or new construction
• 100% financing with no down payment required
• Below market interest rates
• Fixed rate mortgages with terms up to 38 years
• Flexible credit standards and income limits

The loans are provided by approved RD lenders and backed by the federal government, Borrowers work directly with participating lenders to apply and acquire RD home loans,

Benefits of Rural Development Loans

RD loans offer many advantages for budget-conscious homebuyers in Michigan:

1. Purchase with No Down Payment

The biggest benefit of RD home loans is that no down payment is required. This makes it easier for buyers who do not have much in savings to purchase a home. Conventional mortgages typically require at least 3-20% down.

2. Low Interest Rates

Interest rates on RD loans are set by the government and are very competitive. Current rates range from around 3.25% to 4.25% for a 30 year fixed rate mortgage. This is lower than conventional and FHA loan rates.

3. Fixed Rate Terms Up to 38 Years

RD loans come with the stability of a fixed interest rate locked in for the full mortgage repayment term, Terms can extend up to a maximum of 38 years, Longer terms spread payments over more time resulting in lower monthly amounts

4. Flexible Credit Score Requirements

RD mortgages are available to borrowers with credit scores as low as 640. This provides financing options for those with less than perfect credit. Minimum credit scores for conventional loans typically start at 660.

5. Low or No Private Mortgage Insurance

Most conventional loans with less than 20% down require private mortgage insurance (PMI). RD mortgages often have no monthly PMI premiums charged. This saves money each month.

Rural Development Loan Eligibility

To qualify for an RD home loan in Michigan, borrowers must meet certain eligibility criteria:

• Property is located in an eligible rural or suburban area. RD loans are available for homes in towns or cities with populations under 20,000. Check eligibility on RD website.

• Borrower is a U.S. citizen, U.S. non-citizen national, or qualified alien.

• Household income is within RD income limits based on family size and location. See income limits chart.

• Have a credit history that indicates reasonable ability and willingness to repay debts. 640 minimum FICO score.

• Property appraises for the purchase price and meets RD requirements. Can finance up to 100% of appraised value.

• Have repayment ability based on your debts, assets, and amount of income. Total debt ratios generally up to 41% and 29% for housing.

Meeting basic RD loan requirements above does not guarantee approval. Full underwriting is completed to verify eligibility.

How to Apply for a USDA RD Loan in Michigan

If you want to apply for a Rural Development home loan, follow these steps:

1. Check your eligibility. Use the RD property eligibility tool and income limits chart.

2. Find a participating lender. Ask banks and mortgage companies if they offer RD loans or search on USDA’s online lender list.

3. Choose a property and make an offer contingent on financing. Can be an existing house or land for new construction.

4. Provide documents needed to lender such as income/tax info, credit report, etc.

5. Complete a Uniform Residential Loan Application and other RD forms. Work with lender for help.

6. Lender will underwrite and submit request to Rural Development. USDA will provide conditional commitment if approved.

7. During escrow, lender will order appraisal, finalize conditions, and prepare for closing.

8. Attend closing and take ownership of your new home in Michigan!

This process is fairly straightforward but it is recommended to consult with a real estate agent and experienced RD lender to guide you smoothly through all the steps.

Rural Development Loan Uses

In Michigan, Rural Development home loans can be used for:

• Purchasing an existing home – Buy a resale house located in an eligible rural area.

• Building a new home – Finance construction on land you own or purchase in an eligible rural location.

• Improvements to an existing property – Make repairs, renovations or accessibility modifications to a home you purchase with an RD loan.

• Refinancing an existing USDA RD loan – Streamline into a new RD loan to lower payments or tap equity.

You cannot use RD financing to buy vacation homes or investment properties. These loans are intended for primary residences.

Rural Development Mortgage Loan amounts

RD mortgages provide flexible financing options:

• Purchase with 100% financing – No down payment is required. Borrow up to the full appraised value.

• Loan limits up to $647,200 – Maximum loan amount varies by county. See loan limit map.

• Minimum loan amount $40,000 – Can be financed with an RD loan.

There are no specific debt-to-income limits but lenders will review repayment ability through underwriting. Total monthly payments on all debts along with new mortgage payment should typically not exceed 41% of gross monthly income.

Interest Rates on Rural Development Loans

Rural Development mortgage rates are:

• Fixed interest rate – Most RD loans have a fixed rate for the full loan repayment term.

• Set by USDA – Rates are not determined by individual lenders. USDA establishes rates on a quarterly basis.

• Lower than conventional mortgage rates – Government-backed RD loans offer below market interest rates.

Current USDA RD interest rates as of February 2023 are:

These RD rates are roughly 0.5% to 1% lower than average 30 year fixed conventional mortgage rates. Actual rates quoted will depend on market conditions at the time of your loan application.

Rural Development Loan Terms

Rural Development home loans come with flexible repayment term options:

• Term lengths from 15 to 38 years – Choose a repayment term that fits your budget.

• No prepayment penalties – Extra payments or early payoff allowed without penalty.

• Assumption possible – Loans may be assumable when selling the property in some cases.

The most common term length chosen is 30 years. But shorter terms like 20 or 15 years have the benefit of lower total interest paid over the life of the loan.

Longer terms up to the maximum 38 year repayment period means lower monthly principal and interest payments. But you will pay more total interest over the full loan term.

Rural Development Mortgage Insurance

Most conventional loans require private mortgage insurance (PMI) if your down payment is under 20% of the purchase price. PMI premiums on FHA loans can also be costly.

But RD mortgages provide two main options for mortgage insurance:

• No monthly mortgage insurance premium – This is available on 30 year loans if you put at least 5% down.

• Low annual mortgage insurance premium – Only 0.35% of loan amount per year if you put down less than 5%.

Not having a monthly mortgage insurance payment saves substantially on costs over the life of the loan. Paying an annual premium is also less expensive than monthly PMI.

Common Rural Development Loan Fees

When getting an RD mortgage, you will pay some standard loan fees and closing costs like:

• Origination fee – Up to 2% of the loan amount charged by the lender. Can be financed into loan.

• Discount points – Optional points paid to lower interest rate. Each point is 1% of loan amount.

• Appraisal fee – $400-$500 for appraisal report.

• Credit report fee – $25 per borrower for credit check.

• Inspection fees – $200-$300 for well/septic or appraisal repairs.

• Title insurance fee – Varies by county, around $2 per $1,000 of mortgage.

• Recording fees – Charged by county to record mortgage. $10-$40 per page.

• Taxes and insurance escrows – 2-3 months required at closing for property taxes and homeowners insurance premiums.

Most lenders allow you to finance closing costs into the loan amount