USDA loans offer the simplest qualification requirements, yet the most specific property guidelines over any other loan type. If you are a first-time home buyer or a subsequent homeowner, this program is a suitable method of financing a home if you fall within the low to medium income bracket for your area. There are many requirements you must follow in order to qualify for this program, but if you meet those guidelines, the individual factors that enable you to get approved for the loan are among the most flexible in the industry.
USDA Credit Qualification Requirements
The credit guidelines for the USDA loan program are very flexible. Generally, you need to have a credit score higher than 580 in order to apply for this method of financing. If your score falls in between 620 and 580, the agency considers you a “higher risk” which means your file will be under more scrutiny than it would if you were to have a better credit history. In general, however, everyone must have the same basic qualifications, including very few late payments reporting on their credit report. More than one late housing payment in the last twelve months requires the lender to look back at your housing history for 3 years. If there are more than 2 late payments in that time, you become ineligible for the loan. All other credit requirements are simple to follow and easy to work around, especially if you have a high credit score.
USDA Income Guidelines for Borrowers
The USDA loan program is among the only finance products available that requires you to make less money, rather than more. Because USDA financing began to help those with low income become homeowners, you must fall underneath 115 percent of the average income for your area. Every area has a different median income based on its cost of living. In addition, your family size helps to determine the allowed total income for your household. For example, if you have 5 family members, you have a higher allowed amount than a family of 2 in the same area. The USDA will take into account the salaries and wages of all adults in the house that work full-time as well as those that work part-time and have held that job for the last 12 months. Certain alternate incomes get figured into the amount as well. These sources include social security, disability, alimony and child support. Any income that can be proven by the source as well as its receipt with your bank statements and that is set to continue for at least 3 years will get figured into your total income. The gross amount of earnings you bring into the household is not what the USDA uses to determine your eligibility, however. They use an adjusted figure, which takes into account the allowances you are eligible to deduct if you have children; anyone disabled living with you; or an elderly person residing in your home. The USDA calculates your eligibility after the specific deductions are taken.
Down Payment – 100% Financing
One of the negatives in any loan program is the amount of money you must come up with to get the loan. As it stands right now, FHA loans and the Conventional 97 program offer the lowest requirements – the FHA requires 3.5 percent and the Conventional 97 requires 3 percent up front. The USDA down payment requirements make those programs look expensive in comparison, though. One of the largest benefits of the USDA loan is that you do not need to put any of your own money down on the home in order to purchase it. The only other program that offers this benefit is the VA loan, which of course, you must be a veteran to receive. In addition to the ability to put nothing down, you can roll your closing costs and the 2.75 percent funding fee into the mortgage if there is room between the contracted purchase price and the appraised value of the home. If you wish to refinance into another USDA product, you can roll the closing costs into the mortgage if there is adequate equity to keep your loan amount less than 102 percent of the value.
Maximizing your Loan-to-Value Ratio
If you are not able to put any money down on the USDA loan and want to roll the closing costs into the loan, the home you purchase will need to appraise for a value higher than the contract price you pay. For example, if a home appraised for $120,000, but your contract price is $110,000, you have $10,000 available to pay for the closing costs (not that they would get that high). This is how the agency enables you to put nothing down and still roll your costs into the loan. Many people roll not only the closing costs but also the funding fee of 2.75 percent of the loan amount into their total loan amount. Consumers that wish to purchase a home in a rural area have a great advantage with the USDA program because of the little amount of money that is necessary to purchase the home. Combining the no down payment requirements with the low income requirements and favorable terms makes this loan program a great way to purchase a home and still have money in your pocket for moving expenses and starting out in a new home.
USDA Property Eligibility
USDA loans are meant for home buyers that would not qualify for any other type of financing because of their inadequate amount of income. Because of its unique purpose, there are specific USDA property requirements you must meet in order to take advantage of this loan program.
Rural Location Requirements
The easiest parameter to meet when it comes to USDA financing is finding a home in a rural area. If you look at the USDA website, you can see which areas around you are considered rural. You will likely be surprised at the vast area that is included. Generally, areas with a population of less than 20,000 are within the parameters of the rural guidelines and more than 90 percent of the United States falls within the USDA boundaries.
The House Size and Value
The housing covered under the USDA program includes only those homes that are considered modest. This means their value does not exceed the maximum USDA loan amount for your area, which can be found on the USDA site broken down by county. In addition, the property may not have any of the following features:
- In-ground swimming pool
- Land or building area that will allow for income producing
In addition, every home must be safe and sanitary to live in for this program. This means it must pass a proper inspection, be structurally sound, and have working systems including plumbing, electrical, sewage, and heating/air. A licensed inspector will determine the status of the property for the lender in order to determine if it passes USDA guidelines. In addition, if the inspector determines that the home is within a flood range, it will be necessary to secure flood insurance in order to meet the USDA property requirements. The dwelling must also be easily accessed by main roads and all streets must be hard surfaced. The USDA property requirements are not out of the scope of many other loan programs, but it does require that your home not be overly costly. This is done to help those that need the financing to become homeowners that would otherwise be left without a place to live as a result of inadequate income and qualifying factors. The USDA is rather particular about the properties it allows into its program, making it one of the harder requirements to meet. The property must be within the rural boundaries set forth by the agency, which you can find directly on their website. There are numerous areas considered rural, many of which you might not even realize, so it is worth checking out what areas can qualify for this program. Once you are within the boundaries, however, you must purchase a home that is modest in nature. This means that its price is not higher than the maximum loan amount set forth for your area. In addition, the home must not have a swimming pool or be used for any type of income production. An inspector will determine if the property meets USDA guidelines as well – it must be structurally sound, safe, and sanitary to live in for USDA financing. The USDA loan requirements might sound specific and rather difficult to meet, but overall, they are much more flexible than any other mortgage product. Once you are within the USDA boundaries and have the credit score and low enough income to meet the parameters of the program, most lenders can work around all other requirements to get you qualified.