USDA financing provides 100% loans for eligible borrowers. Just how much can you borrow though? The allowed amount may surprise you.
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The USDA Maximum Loan Amount
Technically, the USDA doesn’t have a maximum loan amount. What it depends on is your debt ratio. The USDA allows a 29% housing ratio. They also allow a 41% total debt ratio. This right here will tell you the maximum amount you can borrow.
Because the USDA also maximizes the amount of income you can make in order to be eligible for a USDA loan, they indirectly set maximum loan amounts. For example, if the maximum monthly income in your area is $6,000, you may only qualify for a maximum mortgage payment of $1,740 as that is 29% of $6,000. Of course, in order to truly qualify for that amount, your other debt would have to low enough to keep your total debt ratio at or below 41% of your gross monthly income.
Proving Eligibility for the USDA Loan
Before you try to determine your maximum USDA loan amount, though, you should determine if you are eligible for the USDA loan in the first place. USDA loans are technically for low to moderate income families that cannot qualify for any other type of loan.
You can determine your USDA eligibility by determining your gross monthly income for your household. This includes anyone over the age of 18 that makes an income in your household. This includes children that make an income and still live with you.
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Before you assume you won’t qualify because you have too many working or income producing family members living with you, learn the allowances you may receive.
If you have any of the following, you can take the appropriate allowance off your gross monthly income:
- Children under the age of 18-years old give you an allowance of $480 per child
- Children over the age of 18 that are full-time students give you an allowance of $480 per child
- Any disabled family members living with you give you an allowance of $480 per person
- Any elderly family members (over the age of 62) give you an allowance of $400 per person
These allowances, any of which you are eligible to receive, get deducted from your gross monthly income. In some cases, they could knock you down from ineligible to eligible for the USDA program.
Proving You Can Afford the Loan
The number one factor the USDA wants to make sure is that you can comfortably afford the loan. Lenders are going out on a limb to give you USDA financing, because they provide 100% financing and you only need a 640 credit score. You have to be able to prove beyond a reasonable doubt that you can afford the loan amount the lender approves for you.
While the USDA guidelines are flexible, the USDA is careful about who they provide loans to. They want to make sure that you are not a high risk of default. This is because the USDA provides a guaranty to the lender. The USDA doesn’t fund the loan, but they do promise the lender they will pay the back a portion of the money they lost if you default on the loan.