You may have heard about this home loan program and wondered how to qualify for a USDA loan. The United States Department of Agriculture, or USDA, administers this special home loan program designed to help those buy a primary residence in so-called “rural” areas. However, the USDA recalculates its eligibility map as population centers shift but eligible areas are sometimes hardly recognizable as “rural” and in fact are located in developed areas. You won’t find any in a downtown metropolitan area but don’t be surprised if an eligible area is located in a suburban or semi-suburban area.
The USDA loan program offers some very competitive interest rates and does not require a down payment. Sound attractive to you? Of course. So, how do you qualify for a USDA loan?
USDA Loan Income Qualifications
There are income limits for this loan program and borrowers cannot exceed these limits established by the USDA. The headline number is 115% of the household median income for the area where the property is located. Median income is set by the United States Census Bureau and is used by multiple government and private agencies.
Qualifying income however is not the amount listed as gross pay on your pay check stub but rather takes into consideration the number of persons that will live in the household. The maximum income limit is lower for households with 1-4 occupants compared to a home with 5 or more.
Qualifying income is obtained through multiple calculations and various deductions based upon the age of the occupants, any child care expenses and any full time students. Yes, you can use your income and compare 115% of that to the median income for the area but there’s much more to it than that. You need to speak with an experienced USDA loan officer to get the details.
Your income will be verified by your USDA lender. You can expect to provide your most recent pay check stubs covering a 30 day period as well as showing year-to-date totals. If you receive income from self-employment or other regular income that can be verified having a history, you’ll be asked to provide your income tax returns.
USDA Approved Areas
The second qualifier is the location of the property. This is relatively easy to discover using the USDA website. You can visit the website on your own or you can ask an experienced USDA loan officer to help. By all means, don’t assume the area isn’t eligible simply because of the way it looks. USDA loans can certainly finance a home miles away from a city but eligible areas can also be located in areas that look nothing like a rural area.
All you need is the property address you’re thinking of buying or the county where you want to live. Type in the information and you’ll get your result. It’s important to note however, there is a disclaimer on the USDA website that clearly spells out the fact that the information is not final. Most often, the area is properly identified but the USDA wants you to understand that final determination may be different. Again, it’s important you speak with a loan officer.
USDA Loans and Credit
Like other government-backed mortgage programs such as an FHA or VA loan, USDA does not establish a minimum credit score however, most USDA lenders do ask for at least a 640 score. Your lender will pull your credit history from the three main credit repositories, Experian, Equifax and TransUnion, each of which will provide a score and while they may all be similar they are rarely exactly the same. The lender will use the middle score of the three. For more than one borrower, the lender will use the lower middle score.
If you don’t have a credit score, some lenders do allow for “alternative” credit history. Using alternative credit means documenting your rental history as well as on-time payments for utility bills. Not all lenders accept alternative credit for USDA loans so be sure to check ahead if you think this might be an issue.
Ability to Repay
Finally, the lender will determine your ability to repay the mortgage. This is accomplished comparing your gross monthly income with the new mortgage payment including principal and interest, mortgage insurance, property taxes and hazard insurance. In addition, your other monthly credit obligations such as an automobile loan, student loans or minimum credit card payments are considered as well. Installment debt with more than six months left must be included in this figure.
There are two calculations, your housing payment and income and all payments and income. USDA guidelines ask your total housing payment be no more than 29 percent of gross monthly income although that may go as high as 32 percent. When considering all monthly debt, the maximum debt to income ratio is 41 with exceptions made to 43.
Remember, these are general guidelines and there will always be some special considerations. Not many lenders are experienced with USDA loans so you need to make sure you speak with someone who is. If you think you might be eligible, it’s time to take the next step and contact a USDA lender.