USDA Loans: The 100% LTV Alternative

USDA Loans Overview

Compared to other mortgage programs currently available in today’s market, the USDA home loan is a relatively new entry. Perhaps this is one of the reasons the program isn’t so widely known. Mortgage lenders tend to offer primarily conventional loans underwritten to Fannie Mae and Freddie Mac standards in addition to FHA and VA mortgages. Loan officers typically get introduced to the lending world using these traditional loan types and rarely do they even venture into the USDA world. That’s unfortunate because USDA loans are one of two that don’t require a down payment. Zero down. And unless the borrower is a veteran of the armed forces or otherwise VA eligible, there are no other no down payment loans in today’s environment.

The USDA loan is sponsored by the United States Department of Agriculture and was originally designed to assist those wishing to buy and finance a home with little or no money down in less densely-populated areas. The USDA program can be used only in areas approved by the USDA and runs a website that borrowers can access to see if the property they wish to buy is geographically eligible. What are the basic qualification requirements?

Loan Limits

When compared to other loan programs, there is no limit on the amount someone can borrow. Fannie, Freddie, VA and FHA all have loan limits and can vary slightly depending upon the area. For instance, in so-called “high cost” areas where the median home price is much higher compared to other parts of the country, the loan limit is adjusted upward.

Yet the USDA loan has no such limit. Borrowers instead are limited based upon debt-to-income ratios. These ratios compare the amount of current debt with the new mortgage and associated payments such as property taxes, hazard insurance and mortgage insurance. Once the monthly debt is calculated, it is compared to gross monthly income. Using current market rates, most USDA lenders ask the debt ratio to be no greater than 43% of gross household income.

Credit

Just as the government doesn’t require a minimum credit score, USDA lenders follow the same format. Instead, individual lenders require a minimum score. When USDA lenders pull a credit report on a borrower, they also request a credit score from each of the three main credit repositories, Equifax, Experian and TransUnion. These three scores will be slightly different and the lender will toss out the lowest and highest scores, using the middle one for qualifying purposes.

Lenders will also verify a 12-month rental history from the borrowers who are on the mortgage application. This 12-month history is typically waived for those who have just graduated from college or trade school. Other exceptions can be made for those who are living with parents and buying their first home.

Income

USDA loans ask the borrower’s monthly income not exceed 115% of the median household income for the area. This income is derived using a formula established by the USDA and there are certain requirements that must be met. It’s important to note that while the 115% limit is generally correct, there are other details that need to be addressed. Sometimes potential borrowers will do some research on their own and find out their income “just misses” the 115% limit and look for another option. This is a mistake. You need to work with an experienced USDA lender who can run the proper calculation for you.

Occupancy

The USDA program can only be used as a primary residence and cannot be used as a rental home or vacation home. The program also doesn’t allow for non-owner occupants to appear on the mortgage to help qualify. There are times however when borrowers buy a home using the USDA program then after a few years buy another home and keep the original as a rental property. In this instance, that’s okay.

There are a few things that are a bit different with the USDA program compared to other mortgages on the market but if you are in fact looking for a home and finance it with no money down, you need to explore the USDA option.

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