The USDA loan has many myths which follow it. One of the largest myths is that you have to be a first time home buyer in order to qualify for the program. This is not true. The USDA does not have any housing ownership restrictions in their guidelines. What they do focus on is the location of the property, the number of people in your household and the amount of income your total household brings in to determine your eligibility. You have to fit into each of these categories in order to secure USDA financing.
The Property Location
The property location plays one of the most important roles in your ability to secure USDA financing. If you wish to purchase a home outside of the USDA boundaries, you cannot secure a USDA mortgage. You can find out if a property you wish to purchase is located within the boundaries by visiting the USDA website. On this site, you can search by individual property or by general area to get an idea about where you should start your home search. Do not be fooled by the term “rural.” Yes, the USDA loan is for rural properties, but you might be surprised to learn how many properties actually fall into the boundaries, providing you with lucrative financing options.
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People in your Household
You might wonder why the USDA cares about your household members if they are not on the loan. They do play a role in your eligibility for the loan, however. On the USDA eligibility website, you will see the USDA inquire about how many people live in your home, the number of children under the age of 18, the number of disabled people, and the number of full-time students. They also ask how many elderly people live with you. After inputting this information, they ask you to input the income from not only the applicant, but also any other household members. The program then lets you know if you are eligible for the program based on the money brought into your home. This is not your qualifying income; however, it is just your eligibility income.
The income guidelines are based on the number of people in your home – the more people who live with you, the more money you can bring into the household. You also get allowances for certain people, such as children under the age of 18, full-time students, disabled relatives and elderly relatives. After your allowances, you cannot exceed the income for your area in order to be eligible for the program.
A Program for Low-Income Families
The USDA puts so much emphasis on the household income because they built the program for low-income families, not just first time home buyer. It was designed to help families move into areas which were suffering because of low population and commercial activity. It was the hope of the USDA that if they gave the area some activity, the economy would start to improve. This is why families who make more than the allotted amount for the area are not eligible for the program. It has nothing to do with people who owned a home before unless they already own suitable housing.
It is not for Investment or Second Homes
One thing this program is not for is to finance investment or second homes. The USDA simply wants to provide an affordable housing solution for low-income families who do not qualify for any other type of financing, including FHA and conventional loans. If you are eligible for one of these programs, you are not eligible for USDA financing.
The only exception to this rule is for borrowers who own a mobile home. The USDA does not recognize a mobile home as safe and sanitary housing, so they do allow you to secure USDA financing on a “second” home. Another exception occurs for people who have to relocate for their job and the commute exceeds 50 miles; however, this is up to each lender’s discretion.
First Time Home Buyer USDA Guidelines
Overall, the USDA guidelines are fairly flexible. As long as your income falls within the specified range for your area and your debt ratio does not exceed 29/41, you may be eligible. Your credit score plays a role, but mostly in how much the lender needs to evaluate your file. For example, a borrower with a credit score over 620 will not have to verify as much as a borrower with a credit score between 580-620. These borrowers undergo further scrutiny with the lender and the USDA. Overall, no one should have any late payments reporting on their credit report or any open collections.
The USDA program provides a great way for a first time home buyer as well as subsequent homeowners to secure financing. If you wish to purchase a home in a “rural” area, you can do so with this program which does not require a down payment and has low interest rates. If your family’s household income meets the guidelines, it is a program worth using as it allows you to save money on interest in the long run, enabling you to pay your loan off quicker.