The USDA program offers borrowers a great way to purchase a home with no down payment. They also have competitive interest rates and flexible underwriting guidelines. The USDA formed the program for low-income families who live in rural areas. Their definition of rural may differ from yours, though. It does not mean you have to purchase a home out in the middle of nowhere. Instead, the USDA defines rural as communities with fewer than 10,000 residents. It is their hope that by providing financing in these areas, the rural communities will begin to thrive. Just how do you find the USDA approved homes? Here are some simple tips.
The Property Eligibility Map
Let’s start with the fact that the USDA does not have a list of USDA approved homes. Instead, they have a map they provide on their website to help you determine the areas eligible for USDA financing. Each home must go through an inspection in order to determine if it is eligible for USDA financing. To start, though, you need to find a home within a designated USDA area. It does not help you to look at homes outside of this area only to find out they do not qualify for the program.
The map is simple to use:
- Navigate to the USDA website
- Enter a specific property address if you have one
- If you don’t have an address, enter the state or zip code you intend to live
- The map will pop up with shaded areas that are ineligible; the other areas are eligible
- You can play around with different areas by dragging the pinpoint from one area to the next to find eligible areas for USDA financing
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USDA Approved Homes
Once you find an area eligible for USDA financing, you have to find a home that passes the USDA inspection. A few of the requirements include:
- The size must be average for the area
- No attached commercial buildings are allowed
- No part of the land can be used for income production
- The property must have direct road access
- There must be properly working utilities
- Water tests must pass state and local requirements
- The home must be immediately livable
- All local building codes must be met
- There must not be any termite damage
- There must not be any mold damage
- All plumbing and electrical systems must be in working order
Two professionals will look into the quality of the home – the appraiser and inspector. The appraiser and inspector both help the lender and USDA determine the eligibility of a home. The appraiser determines the fair market value of the home as well as looks at its general condition. This is to help the lender determine if the home is worth the loan you need. The inspection dives deeper into the inner workings of the home to determine if there are any issues that would prevent USDA approval.
Personal Requirements for USDA Loans
Keep in mind, even if you find an approved home, you have to qualify for the program yourself. The USDA eligibility works a little differently than any other program. In this case, the less money you make, the better your chances of qualifying. The USDA looks at your entire household income before determining your eligibility. .This differs from qualifying for the loan itself. The first step is determining if you qualify for the program itself. The USDA requires you to disclose the income of every person in your household, not just those on the loan. They then allow you to deduct from your income for the following situations:
- $480 for every child under the age of 18
- $480 for every child over the age of 18 who is a full-time student
- $480 for every disabled person living with you
- $400 for every elderly person living with you
These deductions come right off of your gross monthly income for the entire household. The final number is how the USDA determines your eligibility. If you go to their income eligibility website, you can determine how your household’s income compares to the maximum for your area.
Once you know your household qualifies, you will use your income and that of your co-borrower to qualify for the loan. The USDA has very flexible underwriting guidelines:
- Credit score of at least 640 for automated approval, but you can have a lower score and use manual underwriting
- Debt ratios around 29/41
- Late mortgage/rental payments cannot exceed 2 in the last 3 years
- The last 12 months must show on-time mortgage/rental payments
You do not have to verify assets with the USDA loan because you do not need to put any money down on the home. They provide 100% financing for those who qualify for the program. Keep in mind, however, that you will pay mortgage insurance up front as well as an annual mortgage insurance which your mortgage servicer divides equally amongst your 12 monthly payments.
Finding USDA approved homes may take you a little longer than any other program because of the complexity of the program’s requirements. Starting with finding an area that is eligible for USDA financing is a great place to start. Once you narrow the area down, you can look at specific properties. Keep in mind that you may have delays or difficulty with the process once the appraisal and inspection are underway. Having these processes completed early on can help to prevent delays in your closing. If the appraisal or inspection do prevent you from using USDA financing, you will minimize the amount of time you waste on the process.
The key is to have patience and use as many resources as possible when looking for approved USDA homes. There are many homes out there that meet the requirements; it just might take a little picking through the weeds before you find one eligible for the program.