What is a USDA Loan?
A USDA Loan is part of a loan program created by the federal government specifically for rural areas. The goal of the program is to provide an affordable alternative to traditional and FHA lending for people in rural areas to help provide the opportunity and benefits of home ownership. The program was specifically designed for those with low to moderate incomes with a focus on making viable financing available. A USDA Loan is a government-insured loan which is issued by a certified USDA lender.
These loans are popular because they offer options not always available with traditional lending. This includes zero-down purchases, no mortgage insurance, more flexible credit criteria, and seller-paid closing costs.
Why does USDA only offer these loans in certain areas?
Smaller, rural communities tend to have fewer lending options than more metropolitan areas. As a result, finding affordable loan options is much harder, and the government wants to encourage people to get housing where it is less congested. Also, people in these areas don’t always have the same levels of income that is typically available with traditional city living. This is why USDA has a mission to help all individuals, regardless of income, be able to realize the dream of owning their own home.
How does the USDA Rural Housing Loan Program determine eligibility?
USDA has four primary ways of determining whether or not you are eligible for a rural housing loan.
First, you must meet the location requirements. Each state has designated rural areas in which these loans are available through qualified lenders.
Second, you must meet the income requirements. Rural housing loans are specifically tailored for those with low to modest incomes, which is determined according to the area in which you live. In addition, the gross income amount can be adjusted based on dependents, child care, or having a disabled individual in the home. These factors all contribute to the total gross amount allowed for the maximum income available for such a loan.
Third, USDA does a detailed analysis of your credit score and credit history. Where your score comes in at affects how in-depth the USDA will look. People with a credit score of over 620 are much more easily qualified, while those with lower scores will have their history looked at in much greater detail. Bankruptcies and overdue accounts can be disqualifying events depending on the time frames in which they took place.
Fourth, every person’s debt ratio is considered before issuing a loan. The USDA has a 29/41 debt ratio allowance. This means that the total monthly loan payment can be no more than 29% of your gross monthly income and that all of your listed credit liabilities (credit cards, car payments, etc.), including the rural loan, can total no more than 41% of your monthly income. This is done to ensure that every individual has the ability to not only pay their monthly loan payment but also maintain the ability to pay their other living expenses without undue difficulty.
Check here for a full list of eligible rural housing areas and their income requirements.
Are there any upfront and guaranteed fees?
The upfront fees for the loan (closing costs, etc.) ranges from 2% to 4%. Most often, the fee will be at the 2% marker, but mitigating circumstances such as property damages and extra home evaluations can bump that percentage up slightly. Also, there is an annual loan fee of .40% of the loan amount.
What is PMI?
PMI, or Private Mortgage Insurance, is an insurance usually tacked on to conventional or FHA loans. This insurance protects the lender in case of a default on the loan. This insurance is often known by different names depending on the lender. For a USDA loan, it is the annual guaranteed fee. This fee will exist until the loan value is at 80% of the assessed home value, at which time it will go away. A 20% down payment will help you avoid this fee.
What income counts toward income eligibility requirements?
The total household income is accounted for in eligibility. That amount is adjusted based on dependents under the age of 18, full-time students, and handicapped or disabled persons.
Are USDA loans only for home purchases?
USDA loans are designed for the purchase of new, single-family homes, as well as refinancing of homes, which were already funded by the USDA Rural loan program.
Who qualifies as a co-signer for a USDA Loan?
Co-signers for USDA loans must also have the home as their primary residence. Ideally, they will have creditworthiness and income to supplement the loan payment.
Are there income limitations?
Yes. Income limitations are designated by area. You can find a list of those areas and their associated incomes here: https://www.rd.usda.gov/files/RD-GRHLimitMap.pdf.
What types of properties are eligible?
USDA requires the home for purchase to be a single-family residence. This includes installed manufactured homes, condos, planned unit developments, and single-family residences without a pool.
Do I need a perfect credit history?
No. The USDA will check your credit history for the last 12 months for traditional credit accounts and the last 36 months for mortgage accounts. Overdue payments can be a disqualifying factor but may not affect your ability to get the loan if your credit score is high enough.
Are USDA Guaranteed Loans only for low-income borrowers?
USDA loans are made for low-to-moderate income borrowers.
Can I get a USDA Loan after bankruptcy?
Borrowers can be eligible for a USDA loan if they’ve been discharged from a bankruptcy for more than 36 months for Chapter 7 bankruptcy. For Chapter 13 bankruptcy, as long as all court approved payments have been made, the time frame is 12 months.