Certain lenders can provide borrowers with 100% financing with the USDA loan. The single family housing guaranteed loan program provides middle to low-income families with the chance to secure suitable housing. The guidelines for this program are straightforward for lenders and borrowers alike.
The Purpose of the USDA Guaranteed Loan
The purpose of the USDA guaranteed loan is to help stimulate certain rural areas of the country. By providing funds to purchase the homes, the USDA helps to stimulate the economy in that area. The program helps borrowers who otherwise could not secure safe and suitable housing to purchase a decent and modest home. It is not meant for borrowers who qualify for any other type of financing. It is also not for borrowers that have a primary residence. This program is for primary residences only.
The USDA’s Guarantee
The USDA provides benefits not only to borrowers, but also to the lenders who provide these loans. Only approved lenders can fund USDA loans, though. The USDA will guarantee loans written by approved lenders after the USDA approves the loan as well. They guarantee 90% of the loan for the lender. This means they will pay the lender 90% of the loan amount back if the borrower defaults. This makes it easier for lenders to provide 100% financing, which is normally a rather risky loan.
Meeting the Income Requirements
One of the largest requirements of the USDA Guaranteed Program is the income requirements. You can look at the requirements a little differently than any other program. In this case, you can make TOO much and not qualify. Yes, your debt ratio does play a role in approval, but before you get to that point, you have to meet the eligibility guidelines. This means your family’s total income must fall within the program’s guidelines. There is not one set amount of income you can make, though. There are many factors that play a role, including:
- Size of your family
- Number of family members bringing in an income
- Number of household members over the age of 62
- Number of household members with disabilities
- Number of children under and over the age of 18
If you have children, elderly household members, or disabled household members, you may qualify for a deduction off your eligibility income. The USDA calls these deductions allowances. They are as follows:
- $480 for every child younger than 18
- $480 for every child older than 18 but is a full-time student
- $480 for every disabled household member
- $400 for every household member older than 62
Follow this process to determine your family’s eligibility income:
- Add up all income from every household member (including non-applicants)
- Determine if you qualify for any household allowances from above
- Calculate your household’s total eligibility income
Once you have this figure, compare it to the income charts provided by the USDA. This will tell you if you are eligible for the program. Remember, this is different than whether you qualify for the program. We will get to that later.
Qualifying for the Loan
Once you know you are eligible for the program, you can apply for the USDA loan. This works much the same as applying for any other loan. You need the following documents for you and your co-applicant. This does not mean your entire household. You cannot use the household income to qualify for the loan. The USDA simply wants to make sure your household’s income does not exceed the maximum income for the area. Now you use only the income and other personal factors for you and your co-applicant. The documents you need include:
- Paystubs for the last 30 days for each borrower
- W-2s for the last 2 years for each borrower
- Tax returns if necessary (self-employed or commissioned borrowers)
- Credit reports for each borrower
- Asset statements for each borrower, if necessary
The USDA does offer some leniency for credit scores and debt ratios. For example, they prefer a minimum credit score of 620 for most borrowers. However, they will allow scores as low as 500. These loans will undergo more evaluation, though. Borrowers with scores over 620 have a more streamlined process. In other words, you don’t need other factors to offset the low credit score. If your score is below 620, having a low debt ratio, stable employment, or liquid assets could help to offset your loan’s risk.
As far as debt ratios are concerned, the USDA prefers a maximum of 28% on the front-end. This means your proposed mortgage payment including the principal, interest, taxes, and insurance should not exceed 28% of your gross monthly income. They also prefer a 41% maximum on the back-end. This means your total monthly obligations should not exceed 41% of your gross monthly income. Keep in mind, this includes the debts of both you and your co-borrower. Of course, you also get to use your co-borrower’s income to help you qualify.
Finding the Right Home
Another large stipulation of the USDA program is the home’s location. It must be rural. However, the definition of rural differs periodically. The USDA follows the most recent census tract. This means the eligible areas are based on the area’s population. It also must be outside of the city lines. This does not mean only country properties – you may find homes just outside of the city lines that qualify. You can verify the eligible areas on the USDA map.
The Many Uses of the Single Family Housing Guaranteed Loan Program
There are many ways you can use the Single Family Housing Guaranteed Loan Program. The most common uses are to purchase a new or existing home for primary residential use. You have the option to wrap your closing costs into the loan without affecting the loan-to-value ratio. In some cases, you can also use the program to not only purchase a home, but also repair it to make it livable. If you have a disabled household member, you can use the loan to make the home accessible for the household member. You can also use it to refinance your current USDA loan.
The Other Loan Programs
One of the largest restrictions of the USDA loan is if you are eligible for any other loan program. For example, if you have 3.5% of the purchase price of the home in liquid assets and you have a minimum 620 credit score, you may qualify for FHA financing. The USDA does not provide financing to anyone who many qualify for other loan programs. This is how they keep their reserves high and their fees low. They only guarantee loans for borrowers that would otherwise be unable to secure financing for a home.
You also cannot secure USDA financing if you defaulted on any type of federal loan. If you defaulted on an FHA loan in the past or you failed to pay your federal taxes, you cannot secure a USDA loan. In fact, you are likely barred from any type of government financing, not just USDA loans.
The Single Family Housing Guaranteed Loan Program provides the opportunity for low-income families to purchase a home. At the same time, it helps to stimulate the economy in rural areas that may need a little assistance. The USDA guarantees the loans for lenders to make them more willing to provide the otherwise risky loans to qualified borrowers today.