Do you dream of owning your own home, but don’t have enough money for a decent down payment? The FHA loan, which is great for first-time homebuyers, requires 3.5% down on a home. Even on a $150,000 home that means $5,250 and that doesn’t include closing costs. If you don’t have that kind of money, consider the USDA home loan.
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This government-backed program offers flexible financing options with no down payment requirement. You can secure 100% financing and you don’t even need great credit. Keep reading to learn how this government program can help you.
Minimum Credit Score
The USDA requires a minimum credit score of 640 for their program. In the eyes of the credit bureau, that is a ‘fair credit score.’ It’s not a hard score to pull as long as you don’t overextend yourself and you pay most of your bills on time.
If you are unsure of your credit score, see if any of your current financial institutions provide free credit reporting. Many credit cards and even banks offer monthly access to your credit score at no charge. At the very least, you can pull your free credit reports from each of the three bureaus to see your credit history. This way you can determine if you have all timely payments and see first-hand how much debt you have outstanding.
It seems strange to say ‘maximum income,’ when usually the more you make, the better of you are on a mortgage. The USDA, however, caters to low to middle-income families. If you make too much money, you won’t qualify. It’s meant for those that cannot afford any other method of financing.
You can determine if you are eligible for the program, but entering your income information here. The program will also ask you questions regarding your family situation. They need to know if you have children under the age of 18, children over 18 but full-time students, elderly household members, and/or disabled household members. If any of those apply, you may use allowances, which reduce your eligibility income. In general, you cannot make more than 115% of the average income for your area in order to qualify.
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As a side note, the USDA uses your total household income for this calculation. This isn’t just you and the co-borrower. It’s you, the co-borrower, plus any other adults or adult children that make an income. Their income must get figured into your eligibility income.
Maximum Debt Ratio
Like any other loan, the USDA enforces specific debt ratios. Generally, your monthly housing payment can total up to 29% of your gross monthly income. Now this is just the income of you and your co-borrower. Your total housing payment includes the principal, interest, taxes, homeowner’s insurance, and mortgage insurance.
They also enforce a total debt ratio of 41%. This means the above payment plus any other monthly debts, such as credit cards, auto loans, or student loan payments must be included. The total minimum payments cannot be more than 41% of the gross income you and your co-borrower make each month.
Eligibility for Other Loans Not Allowed
Finally, you cannot be eligible for any other loan program. This includes any government-backed programs, such as the FHA or VA loan. The USDA loan should be a ‘last resort’ for borrowers that do not qualify for any other program.
This is why they keep a close eye on how much money your total household makes. They recognize that multiple generations often help with household bills. If you can afford an FHA loan, which requires 3.5% down and slightly higher monthly mortgage insurance, the USDA does not need to guarantee a loan for you.
They have these strict requirements because it’s a self-funded program. Plus, the USDA guarantees the loans for the banks. Approved banks can hand out these ‘risky’ loans because they are for 100% of the value of the home. If the borrower defaults, the government will pay the bank back a portion of the money they lost.
The USDA loan is a great way to become a homeowner if all other methods failed. However, you will have to resign yourself to living in a ‘ rural area.’ Luckily, those areas are much larger than most people would anticipate. You can view them here. If you are eligible for this program, it can be a great and affordable way to get into the home you want.