Are you looking to buy a home in a rural area? You might just be eligible for USDA financing, which provides you with a 100% loan and flexible guidelines. Many first-time or even subsequent homebuyers want to know if they can buy condos with this type of financing, though. Is it strictly for single-family homes?
Luckily, you can buy a condominium with a USDA loan. The catch, though, is that you’ll have to abide by some different rules pertaining to the property itself.
What Rules do Condos Have to Follow?
Because condos are multi-unit buildings that have units owned by many people and common areas overseen by the HOA, there are some different rules you’ll have to follow.
- If the development has already been approved by another entity, such as HUD, FHA, VA, Fannie Mae or Freddie Mac, it’s automatically eligible for USDA financing
- The lender may still want to inspect the property themselves to make sure the certification by one of the above entities is certain. The lender takes on a big risk assuming the development is approved by one of the above entities.
- The lender must have adequate proof that they made a good faith effort to ensure that the condo is approved by one of the above.
Qualifying for a USDA Loan on a Condo
A lender will go through the same qualifying process when you buy a condo or a single-family home. First, the lender must determine that you are eligible for USDA financing. This program is only for borrowers whose total household income is less than 115% of the average income for the area.
The USDA determines this by looking at your total household income. This includes everyone, not just the borrowers. If you have relatives living with you that make income, their income counts. If your household income doesn’t exceed the limit for the area, you are eligible.
Once you prove your eligibility, the lender will determine if you qualify for the loan. This is different. Now you will use your income and that of your co-borrower. You must prove that you can afford the loan payments and stay within the USDA’s allowed debt ratios of 29% housing and 41% total debt.
In that debt ratio, the lender must include any homeowner’s association dues you must pay. This gets included in your front-end ratio. In addition to the HOA dues, the lender must consider the principal, interest, taxes, and homeowner’s insurance, which you must buy even if you live in a condo.
Along with meeting the debt ratio guidelines, you’ll have to prove that you have at least two years of employment history and a history of stable and/or increasing income. You must also prove that you don’t have any defaulted federal debt and that your credit score is at least 640.
Keep in mind that each lender can have their own rules as well. These rules stated here are the USDA rules. The USDA doesn’t fund the loans, though; the lender funds them. Because of this, lenders can add more rules onto what the USDA requires. For example, a lender may require a higher credit score or a lower debt ratio when funding a loan for a condo. It helps to decrease the risk of default, which is already higher because condos have a tendency to have higher default rates.