USDA loans provide low-income families with the ability to purchase a home with no down payment. They also provide very flexible underwriting guidelines, including a high debt ratio of 29/40. However, you must purchase a home in a “rural” area and not make more than 115% of the average income for the area. These requirements are often easy for low-income families to meet. Where the confusion comes in is whether you can purchase a HUD home with USDA financing. It would seem like a good idea since the home probably sells for less than other homes on the market and without the need for a down payment, it could be a real money saver for you. However, the answer is not always as straightforward as you would hope. There are plenty of factors at play here.
Can it Pass the Safety and Sanitary Guidelines?
One area the USDA is rather particular is in the condition of the property. The USDA is not in the business of providing loans for homes that require fixing up. The home must be livable right way. Some things might be able to slide through, but serious hazards would never get through the process. The home must be modest, but also safe and sanitary at the same time. The USDA needs this in order to guarantee the loan, meaning back up the lender in the face of default.
The lender you use is obviously concerned with the value of the property compared to the price you pay for the home. If the value is not there, no lender can provide you with funding. Another obstacle could be in the condition of the property, though. If there are any issues with the property that prevent the USDA from providing approval, you have to have them fixed prior to closing on the loan. This can prove to be a difficult task when you are dealing with a HUD home. This differs from an owner occupied home where the seller might be motivated to make the changes in order to sell the home. A bank will not make the changes – instead, they move on to the next bidder, hopefully one who will pay cash for the property.
Is the HUD Home Located in a Rural Area?
Another main concern regarding USDA loans is the location of the property. The USDA doesn’t care as much about whether the home is seller-owned or bank owned. They can provide financing for a HUD home; however, it must be located in a rural area. What you consider rural might not meet the same definition of the USDA, though. Their boundaries change with each census conducted. You can see the latest boundaries on their boundary map. You can search an individual address or a general are to help you determine if the home is within the necessary boundaries for USDA financing.
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Does Your Income Qualify?
Once you know the HUD home you wish to purchase will pass the USDA guidelines, you have to worry about your own income. The USDA considers the entire household’s income when determining your eligibility. This differs from your qualifying income. Qualifying income is the money you and the co-borrower bring in to pay for the loan. This is how the lender calculates your debt ratio and what you can afford.
Before the lender even gets to that point, though, they must determine if your household qualifies. If you have other people living with you who make money, you must include their income in your application. This includes any parents, older children, or other relatives who live with you. Their income plays a role in the eligibility process. Your total household income cannot exceed 115% of the average income for the area. You can find the exact numbers for your area here.
Keep in mind, there are several ways the lender looks at your income. They don’t just take it at face value. Yes, they add up every person’s income, but they also provide you with specific allowances. If any of the below situations apply to you, they may help you become eligible for the program:
- Children under the age of 18 living with you
- Children over the age of 18 living with you who are full-time students
- Elderly people living with you
- Disabled people living with you
All children, including full-time students, as well as disabled relatives living with you decrease your eligible income by $480 each. Each elderly person living with you also provides you with a $400 allowance. This helps to lower your total household income to help you become eligible for the program.
Talk to a Realtor
The best way to determine if you can purchase a HUD home with USDA financing is to talk to an experienced realtor in the area. At the very least, he may be able to give you inside information regarding the condition of the home. Because HUD owned properties and USDA loans both take longer than usual to process, you could find yourself tied up in a very lengthy loophole waiting to hear if you can purchase the home. With an experienced realtor, though, you may be able to get the answers you need faster. This may help you avoid wasting your time on a home that would never pass the USDA guidelines.
If you have your heart set on purchasing a HUD home with USDA financing, know that it is possible. You just have to do your due diligence and wait it out. Knowing ahead of time the condition of the property may help, but there is always the risk of surprises down the road after the professional inspection. Keep in mind that things could go awry and you could set yourself up for success. There are plenty of HUD owned homes out there that you can purchase with USDA financing, it just may take some time to find the one that is right for you.