The government provides many different types of loans. Among those is the USDA loan. This program offers flexible financing for borrowers within certain areas. You must purchase a home in a rural area. In addition, you must not be eligible for any other loan program and you must not make more than the average income for the area. These restrictions sound difficult, but they are rather easy to make work. Before you apply for a USDA loan, use our mortgage application checklist to make sure you cover all of your bases so you can qualify for this zero down payment loan.
Location of the Property
Before you can be eligible for a USDA loan, you must find a property in a rural area. If you are unsure about the area you want to live, check the USDA website. On there, you can determine which areas are rural and eligible for USDA financing. Remember, rural does not mean that you must live out in the middle of cornfields and nothing else. Oftentimes, there are areas just outside of the city limits with a population less than 20,000 that are eligible.
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Minimum Credit Score
Just like any other loan, the USDA has a minimum credit score you must meet. Right now, this minimum equals 640. This might sound high for a government-backed loan, but most lenders require a score at least this high in order to qualify. Even though the USDA only requires a 640, lenders can require higher scores. Since the USDA does not fund the loan, they do not have the final say. The funding lender decides what type of risk they want to take. Some will take a credit score as low as 640, while others require a higher score.
Clean Credit History
Aside from your credit score, the lender will look at your credit history. Try to make sure your credit history is as clean as possible. This means no late payments within the last 12 months. This applies to your rent payment history too. Your lender will verify your rent payments and determine if you have any late payments within the last 12 months. If you do, you may not be eligible for the USDA loan, so work hard to make this a reality.
Income Requirements on the Mortgage Application Checklist
For most loans, the more money you make, the better off you are for loan approval. The USDA loan works differently though. The program began to help those that would otherwise be unable to afford a mortgage purchase a home. Because it is a low-income product, you can make too much and not qualify for the loan. The amount you can make depends on the area you live. You can plug your income into the USDA’s calculator to determine if you are eligible.
Keep in mind, the USDA looks at your household income, not just your income. This means any adult in your home that brings money in must disclose their income. The USDA totals the monthly income of everyone in the house. They then deduct any allowances you may be able to receive. You receive discounts for having children living in the home as well as people with disabilities or the elderly. If your income falls within the guidelines for your area, you may be eligible for a USDA loan.
The USDA does not put a lot of emphasis on the debt ratio, but there are guidelines they have in place. Right now, the maximum debt ratios equal 29/41. This means your mortgage payment including the principal, interest, taxes, and insurance should not exceed 29% of your monthly income. In addition, your total monthly expenses, including the mortgage, should not exceed 41% of your monthly income.
Bankruptcies and Foreclosures
The good news is even if you have a bankruptcy or foreclosure in your past, you may still be eligible for a USDA loan. Before you apply, though, make sure enough time has passed. The requirements are as follows:
- 3 years after a Chapter 7 Bankruptcy discharge
- 1 year after a Chapter 13 Bankruptcy discharge
- 3 years after a foreclosure sale
Of course, if you have a BK or foreclosure in your past, you must make sure your credit has improved. The sooner you start reestablishing your credit, the better off you will be.
USDA loans require an appraisal, just like any other loan program. However, the appraisal must pass not only the value, but also the condition of the property. The home must be safe and sanitary in order for the USDA to allow your loan to close. If there are issues with the home, you may be able to wrap the costs of the repairs into the loan. You may also negotiate the changes with the seller in order to close on the purchase.
The USDA has the Final Say
Even though you apply for the USDA loan with a lender, the USDA has the final say. The lender you use must create a full financial package. This means they gather all of your documents and underwrite the loan. Once they know your loan is fully underwritten and approved on their part, they must send the file to the USDA. The USDA then goes over the loan and provide their final approval to fund the loan.
The USDA Mortgage is similar to any other loan program. The good news is, the USDA loan is not hard to get. As long as you use our handy checklist, you can get through the process rather quickly. The key is to respond to the underwriter as quickly as you can. If he asks for more documents, make sure you provide them. The more information you provide right away, the quicker the process can go. Because the USDA has final say in the approval, you must add a few weeks into the process. Going through the checklist and making sure you provide everything right away will get the ball rolling faster.