Rural homebuyers with low to moderate income may qualify for a USDA home loan. That’s great news because this program offers 100% financing and has flexible guidelines. As you get started, though, you’ll notice that the USDA offers 2 programs – the Guaranteed and Direct loan programs.
Which one is right for you?
The USDA Guaranteed Loan
The most common USDA program is the Guaranteed loan. It works like the FHA loan in the fact that the USDA ‘guarantees’ the loan for lenders. In other words, the USDA promises to pay the lender back a portion of the funds they lose should you default on the home. This allows USDA approved lenders to provide loans to applicants with less than perfect credit or low income.
The funds from this loan come from the lender, not the USDA. The USDA does play a role in the loan process, though. They have the final say in your approval. Once the lender final approves your loan, they must send a complete underwriting package to the USDA for their stamp of approval before they can allow you to close.
In order to be eligible (not qualify) for this loan, your total household income cannot exceed 115% of the average income for the area. The USDA looks at all income-producing adults in your home too, even if they aren’t on the loan. The USDA recognizes that multiple generations live together today and often help one another with the cost of living.
If you are eligible, you then apply for the loan with your co-borrower. Your total household income no longer plays a role. Now it’s up to you and your co-borrower to meet the following guidelines:
- 620 minimum credit score
- No poor economic events in the last few years including bankruptcies or foreclosures
- Maximum housing ratio of 29%
- Maximum total debt ratio of 41%
- A maximum 30-year fixed rate term
You also must not be eligible for any other mortgage program. This includes FHA, conventional, or VA loans.
The USDA Direct Loan
Unlike the Guaranteed Loan, the USDA Direct Loan comes directly from the USDA. You don’t go through a lender, but rather work directly with the USDA to obtain the loan.
Only borrowers that make between 50% and 80% of the area’s average income are eligible for this program. It’s the USDA’s attempt to help very low-income families afford suitable housing. The Direct loan is offered in 33-year and 38-year terms and the interest rate is based on the market, rather than at lender’s discretion.
In order to qualify, you must prove that you cannot qualify for financing from any other program. You must also prove that you don’t have suitable housing at the time of application. However, you must be able to prove that you can afford the mortgage payment you would owe with the Direct loan program.
Unlike the Guaranteed program, there aren’t specific credit score guidelines you must meet. As long as the USDA believes that you can’t qualify for other financing and the property is modest in size, safe, and will be owner-occupied, and you have low to very low income, you can apply for the loan.
The USDA does enforce a maximum 41% total debt ratio for this program, just like the Guaranteed program. This is to help keep your expenses in check, rather than putting you in over your head and making homeownership a burden rather than a benefit.
Typically, Direct loan borrowers don’t have to make a down payment or pay the closing costs. If the USDA can prove that you have enough assets, though, you may be responsible for a fraction of the closing costs. The average USDA Direct borrower pays around $1,000 in closing costs.
Finally, the USDA does require Direct loan borrowers to attend housing counseling. This is to make sure that you understand the debt you are incurring and how it will affect your finances moving forward. It’s the USDA’s effort to prevent a foreclosure.
The Property Requirements
Whether you qualify for the Direct or Guaranteed loan program, you must purchase a rural property. You can view the properties that the USDA considers rural on their map. The home must be modest in stature and size. It should be large enough to suit your family, but not so large that it can be considered a luxury.
If you are an average borrower with moderate income, you’ll likely qualify for the Guaranteed loan. if you have very low income and few assets, though, the Direct loan could be an option that could help you become a homeowner and hopefully better your financial position.