If a 100% financing program with flexible requirements sounds just like what you need, USDA financing might be a good option for you. As long as you don’t have your heart set on a city home, you could be in for a great loan program at your disposal.
USDA loans are for any borrower that is eligible for the program and being a first-time homebuyer isn’t one of those requirements. As long as you don’t own a primary residence and will occupy the home bought with the USDA loan as your owner-occupied property, you can apply for USDA financing.
The USDA loan has flexible guidelines because the USDA guarantees the loan for lenders. If a USDA borrower defaults, the USDA pays the bank back the money they lost and takes possession of the home. Because of this, many first-time buyers use this program to their advantage.
Eligibility for USDA Financing as a First-Time Homebuyer
Before you apply for a USDA loan, you should determine if you are ‘eligible.’ This differs from qualify. An eligible borrower is one that has a household income that is less than 115% of the average income for the area.
You only have to worry about ‘household’ income if someone else lives with you other than the co-borrower. For example, do your parents plan to live in the home with you? Their income counts as the USDA recognizes that multi-generational families help one another out with the cost of living. Because the USDA loan is for those with less than average income, household income could disqualify you for the program.
All you have to do is total up your household income (all adults making an income) and compare it to the average income for your area. It must be less than 115% of that amount. If it is, you can apply for 100% USDA financing.
Qualifying for USDA Financing
The next trick is qualifying for USDA financing. Luckily, the program has relaxed guidelines:
- Minimum 640 credit score
- Maximum 29% housing ratio (mortgage payment versus your gross monthly income)
- Maximum 41% total debt ratio (all debts compared to your gross monthly income)
- Proof of stable income and employment for the last 2 years
- A decent credit history that doesn’t have collections or late payments within the last 12 months
If you meet these requirements, you may secure 100% financing. This means you don’t need a down payment. You only have to worry about the closing costs and the upfront funding fee, which is equal to 1% of the loan amount.
If you cannot pay the closing costs and/or funding fee upfront, you may be able to roll them into your loan amount. As long as the home appraises for more than the purchase price, you are free to roll the costs into the loan. In other words, you can borrow up to 100% of the value of the home rather than just the purchase price.
The Property Requirements
In addition to your qualifying requirements, the property you purchase with USDA financing must meet some specific requirements.
The home must be located within the USDA rural boundaries. These boundaries are much larger than you probably realize. When most people think of rural properties, they think of homes out in the middle of cornfields. That’s not the case – the USDA bases their rural boundaries on the latest census tract and the coinciding population counts within each area. There are many areas that they consider rural that you may never have thought would be rural.
The home itself must also be in good condition. The USDA requires that it is safe, sanitary, and immediately livable. The home must be modest and pass an appraisal conducted by a USDA-approved appraiser.
There isn’t a specific value the home must be other than the fact that it must cover the purchase price of the home. The USDA wants to make sure the home is adequate for your family size and safe to live in without going overboard.
The USDA loan is a great option for first-time homebuyers since it doesn’t require a down payment. It may make it easier for you to buy a home faster because you only need money for closing costs (in some cases). Its flexible guidelines make it easy to get qualified, giving you more options to become a homeowner.