If you want to buy a rural home and you don’t have a down payment, you may want to explore your option for a USDA loan. Who can go wrong with 100% financing and low closing costs, right?
It’s important to know that the USDA loans aren’t for everyone. First, you have to prove eligibility and then you have to prove that you qualify. While it sounds like a lot, there are only a few requirements that are hard and they pertain to the eligibility for the program.
What’s a USDA Loan?
You should understand that the USDA loan is only for borrowers that have low to moderate household income. In other words, if you or someone in your household makes a lot more than the average income for the area, the USDA loan isn’t for you. It’s reserved for borrowers that would be unable to secure any other type of financing.
That being said, the toughest USDA loan requirements are the property location and the total household income. You can use the USDA’s charts to determine where you fall within their requirements.
The Property Requirements
In order to use USDA financing, you have to buy a home within the rural limits that the USDA set. Now what they consider rural and what most people consider rural are usually two different things. The USDA uses the most recent census tract to determine which areas are rural.
While it doesn’t mean you will live in the middle of cornfields with no neighbors for miles, it does mean you’ll live outside of the city limits. If that’s not something you want to consider, the USDA loan wouldn’t be the right choice for you.
The Income Requirements
As we discussed above, you need to be within the average income for your area in order to be eligible for the USDA program. This includes all incomes made from everyone in your household. If you have aunts, uncles, grandparents, or friends living with you – each adult income counts.
The USDA doesn’t provide loans for borrowers that have a household income that exceeds 115% of the income for the area. But, they do allow what they call allowances to make it easier to qualify:
- If you have children that live with you, they will likely be worth a $480 deduction each. The USDA allows this deduction for each child under the age of 18 as well as each child over the age of 18, but that is a full-time student.
- If you have disabled relatives living with you, the USDA provides a $480 deduction for each disabled person living in your residence.
- If you have elderly parents or other relatives with you, the USDA allows a $400 deduction for each elderly person in your residence.
The USDA will look at your monthly income based on the above figures to determine your eligibility income. If you don’t pass this step, you won’t move forward with the USDA loan.
The Qualifying Requirements
Once you get past the eligibility requirements for the USDA loan, the actual qualifying requirements are fairly relaxed:
- 640 credit score
- 29% housing ratio
- 41% total debt ratio
- Stable income/employment
- Proof that you will live in the home as your primary residence
- Proof that you cannot secure any other type of financing
Keep in mind that you can’t apply for the loan with your entire household as co-borrowers. Typically, it’s just you and one other person, such as a spouse, on the loan. The other incomes in the house can help you pay the bills, but they don’t help with qualifying for the loan.