The USDA Rural Development Loan helps a distinct group of people. It is a loan that the USDA developed to help families with little monthly income. It is also to help build up certain areas of the country. These areas the USDA considers rural have less than 20,000 people living in them. Because of this, they could use the economic stimulation. The USDA provides funds to help provide access to suitable housing in the area while building the economy up.
You might be surprised to see which areas the USDA considers rural. They are not just country homes in the middle of nowhere. Instead, it is an area the USDA considers rural based on the latest census tract. Essentially, the homes are located outside of city lines. The USDA does not fund the loans; they only guarantee them. This means if you were to default on a USDA loan, the USDA would pay the bank that holds the loan.
An Affordable Option
The USDA’s program provides 100% financing. You are also able to roll the USDA funding fee into the loan. This means the only cash you need to close is the money to cover the closing costs. In some cases, though, you may be able to roll the closing costs into the loan. This is possible when the home appraises for more than the amount you agreed to pay for the home. In this case, you would have to bring no money to the closing. Because USDA loans often have lower interest rates, you can have an affordable monthly payment on a home you can call your own.
Qualifying for the USDA Rural Development Loan
Qualifying for the USDA Rural Development Loan is easier than qualifying for most other loans. However, you have to meet one strict requirement – you cannot be eligible for any other type of financing. This means any other government program or conventional loan. If you are able to secure a different type of financing, you would not be eligible for a USDA loan.
If you are unable to qualify for any other financing, you have to meet the following requirements:
- You must live in the home
- You must not own any other properties
- You must be a US citizen
- Everyone on the loan must live in the home
If you meet these requirements, you can apply for a USDA loan.
The Right Credit Score
As is the case with any loan program, you need a minimum credit score to qualify. The USDA and most lenders (lenders can have stricter requirements than the USDA), require a score of at least 580 to start the process. Even if your score is over 580, but is less than 619, you are still considered “high risk.” You can apply for a USDA loan and may even secure one, but the lender must highly scrutinize your loan file to make sure you are a good risk. They will take a close look at your credit history, not just the score, to see why your score is so low.
In general, they will need to see some type of housing history with timely payments as well as other debts that you managed responsibly. Don’t worry if you don’t have a mortgage right now, if you rent, your landlord can provide you with a Verification of Rent. This document states how many times you made your rent payments on time and how long you have paid rent to the landlord.
If your credit score exceeds 620, the lender does not have to evaluate your loan file as closely. This means you do not have to verify your housing history or prove that any old debts are paid off. In addition, if you have any special circumstances on your loan, such as a high debt ratio or you have a short job history, you may be able to secure a waiver and still obtain the loan. Your credit score speaks volumes to lenders as it lets them know how financially responsible you are, so it pays to make your debt payments on time.
Basically, anyone applying for a USDA loan must show all of their payments on time. The exception to the rule is one allowed late payment that does not exceed 30 days late within the last 12 months. In addition, if you filed for bankruptcy or had a foreclosure, you must wait 3 years to apply for a USDA loan. Lastly, if you pay rent and have a credit score lower than 619, you cannot show more than 2 late rent payments within the last 3 years.
Verifying your Income
The tricky part about the USDA loan is verifying your income. In this case, the less you make, the more eligible you are for the program. Of course, your income must cover your current debts as the USDA does have debt ratio requirements. In general, you cannot make more than 115% of the average income for your area. To complicate matters, the income the USDA uses to determine your program eligibility is the total income for your household. Anyone in your home who makes money must disclose their income. The total income of everyone in the home determines if you make less than the average for the area.
The good news is there are ways to decrease your total household income. The USDA provides allowances for certain situations which they know affect your total income. These situations include any household with children, disabled relatives, or elderly relatives. In regards to children, you can have children under the age of 18 or those over the age of 18 and attending school full-time. In either case, you can deduct $480 per child off your monthly income. The same is true for any disabled family members residing with you. Lastly, you can deduct $400 for any elderly household members. Once you deduct your allowances, your total household income is evaluated to determine your eligibility for the program.
This is how the USDA makes sure the program only goes to those who are considered low or very low-income families. The USDA recognizes that an entire household can contribute to the home’s monthly bills. This is why they want to make sure families that make too much money do not take away the limited resources they have available to help those in need.
Keep the USDA in Business
In order for the USDA to continue to provide the USDA Rural Development Loan to those who need it, they must charge mortgage insurance. The USDA places the money made from the USDA mortgage insurance premium into a reserve account. This money helps them guarantee the loans they approve. They charge this insurance twice on every loan. The first time is when you close on the loan. This is the upfront mortgage insurance and it equals 1% of the loan amount. You can roll the amount into your loan without worrying about your loan’s LTV. The USDA charges the other mortgage insurance on an annual basis. However, your lender will charge it to you every month in order to cut the costs down. Right now, the USDA charges 0.35% of the loan amount per year. For example, if you have a loan amount of $100,000, you would owe $350 per year. The lender would add $29.16 to your monthly mortgage payment in order for you to have the $350 at the end of twelve months to pay the USDA.
The USDA Rural Development Loan helps both people and the economy. The USDA makes it possible for low-income families to secure suitable housing while building up certain areas of the country. The loan program is easy to qualify for, but it does take extra time to get through the system. The USDA must provide the final seal of approval in order to provide the USDA loan.