Applying for any mortgage can be stressful, but a USDA loan often adds an extra layer of stress because of its requirements to determine if you are eligible to apply for a USDA loan. It is not a strict loan program as far as qualifying goes, but there are many specifications you must meet. Before any lender starts the process and sends your loan package to the USDA underwriters, you should know what you need to provide in order to qualify.
First, you must determine if you are eligible for the program. If you make too much money, you might have to go elsewhere for a conforming or FHA loan. The USDA loan is for families with low to moderate income. The income the USDA uses is not just your income, either. They include the income of everyone in your household. If you have your parents, siblings, or friends living with you, their income counts in the eligibility determination. However, their income will not help you qualify for the loan itself. Only your income and that of your co-applicant will count towards your debt ratio and ability to qualify. You can determine if you qualify by visiting their website and entering your state, county, and personal income information. You will get an instant response regarding whether you are eligible for the program.
In addition to being eligible based on your income, the property you purchase must be within the USDA boundaries. Technically, the property should be a rural property; however, your definition of rural might differ from the USDA’s definition. You can search the property you wish to purchase on the USDA website. You are able to search by individual address or general area to help you determine which homes may be eligible for the USDA program.
USDA Underwriters Requirements
Once you know you are eligible for the program, you have to qualify with the USDA underwriters. The good news is the guidelines are very flexible. The debt ratios allowed are among the highest of any program at 29/41 and you can even secure a debt ratio waiver in some cases. They also have lenient guidelines regarding credit scores. If you want automatic approval from the USDA’s computer software, you have to have a score higher than 640. However, there is still the option for an underwriter to evaluate your file manually if you have a score lower than 640. Most other programs would not even go as low as 640.
A few other requirements the USDA loan program has include:
- You cannot have more than two late housing payments in the last 3 years. If you are a first-time homebuyer, the underwriter will look at your rental history, if you have one. More than two late payments during this time could render you ineligible for the program.
- Of the two allowed late payments, none of them could be within the last 12 months. The USDA wants a clean housing history for the last year to lower the risk they take on your loan.
Creating a Complete USDA Package
In order for the USDA underwriters to send your loan to the USDA for final approval, they must send a complete package. You must provide the following documents in order to ensure timely approval of your loan:
- Proper proof of your income, including paystubs, W-2s, and/or tax returns
- Proper proof of assets, if you use them as a compensating factor (they are not usually required)
- Proof of your identity
- Signed IRS Form 4506 granting the lender and/or USDA access to your tax transcripts
- Signed loan documents including the Loan Estimate and Loan Application
- Signed Form 1008 from the USDA
- Executed sales contract (for a purchase)
- Proof of your credit (lender usually pulls your credit report)
The USDA does not accept partial packages. In order to ensure quicker processing of your loan, make sure you provide all of these documents up front so the USDA underwriters can properly underwrite your loan. Once they are done with it, they send it off to the USDA. This process could add some time to the loan process depending on the workload of the USDA. You should estimate an additional 30 days to protect yourself from a delayed closing.
Overall, USDA underwriters are very lenient. They have some great guidelines to work with and are usually very understanding regarding most circumstances. The most important thing for you to prove is that you are worthy of the loan, even if you have a blemished credit history. You cannot exceed the above guidelines regarding late payments, but you can show that you bounced back afterward with a good credit history and enough money to cover your bills.
The income guidelines to become eligible for the program might seem restricting, but there are many allowances to help your income qualify for the program. If you have children, for example, you can take $480 off your gross monthly income for each child. This includes grown children over the age of 18 who still attend school. You also are eligible for an allowance for any disabled or elderly family members living with you. The USDA recognizes the cost in caring for both and allows a reduction of your income of $480 for disabled household members and $400 for seniors.
You might qualify for the USDA program without even realizing it. Compare your gross monthly income to the chart on the USDA’s website to see how you rank. If you qualify, you are eligible for a no down payment loan with very competitive interest rates. This makes it easy to qualify given the higher debt ratio maximums and ability to have a lower credit score.
The USDA underwriters are usually very flexible and willing to manually underwrite a loan that does not meet the automated underwriting guidelines. Talk to a USDA lender about your situation today. You might be surprised to learn that you qualify!