USDA Loan Eligibility Breakdown
The United States Department of Agriculture offers the Single Family Housing Guaranteed Loan Program with amazing benefits that include $0 down payment, 100 percent financing, low interest rates and far below average mortgage insurance; however, potential homebuyers must meet a few basic requirements to be eligible for this amazing mortgage product.
To break it down, there are 2 factors that make up USDA eligibility, and that is income limits, and property eligibility. Loan eligibility is different from loan requirements. Requirements refer to, what you need to have as a borrower in order to buy a house. For example: credit, work history, tradelines, financial stability.
In comparison, loan eligibility is a little different. It has to do with what USDA requires from you to utilize the program. They have a couple rules in order for you to qualify to use the USDA loan program for your property. The government wants to give this loan to individuals who really need it. They are wanting to help buyers get into a property even if they don’t have a down payment, but the way they determine who can use this loan is by identifying who is in need, and they do this by income. So, the amount of income your family makes per year, and if you fall within the income limit for your county, then you can apply for the loan.
Taking it a step further, the government is trying to spread everyone out and keep cities from being over populated. If you fall under the income limit, great! Next, you would have to find a home in a USDA eligible area. This is an area that the government would like more people to move to and thus is incentivizing those who do so.
USDA Loans and Income Eligibility
The first, and most important, USDA eligibility requirement is whether your household falls under the income limit for the county you are wanting to move to. Your total gross household income is taken into account, looking at all family members that will be living on the property. If you have family members living with you and they are receiving monthly income, then their income will be counted towards the total household income.
Don’t lose hope, we are able to give deductions for family members, child care, age of dependents, medical expenses, and a few other things. If you feel as though you are close to or over the income limit, it’s ok, let one of our USDA specialists calculate the deductions for you. Some individuals who think they are over the income limit, after deductions, qualify for the USDA program.
To qualify for a USDA loan your income cannot exceed the median household income of the county by more than 115 percent. Don’t worry, no one knows how to calculate the household income median, we are not taught this in school. The great thing is that you don’t have to calculate this, we did it for you. The government designated an income limit for each county. Depending on your family household size determines what income category you fall under. For each county there are 2 categories, one is for a family of 1-4 and the second category is for families over 5 people. If you have grandparents, cousins, step kids, or any other family member living with you then they are considered part of the family unit that is counted for USDA. The more family members the higher your income limit. Keep in mind that if those family members are over 18, and not in school, then we need to include their income towards the USDA income limit.
It is important to note that income limits vary by location. Potential USDA homebuyers living in higher cost counties will see larger income limits than those living in more modest counties.
USDA Approved Eligible Areas
The second, and just as important, USDA eligibility requirement is the property eligibility. Is the home located in one of the USDA designated areas? As we discussed before, USDA wants to spread us out and keep the metropolitan cities from being over populated. As long as you find a home in a USDA area (such as California, Texas or Florida for example), and you fall within the income limit for that county, then you are good to go, and can apply for the USDA home loan!
When looking for your home, it is important to keep in mind the basic requirements for USDA eligible properties. They must be located within the USDA Home Loan “footprint,” determined by the State, which is separated by boundary lines. You don’t have to figure this one out either because we have a map in the tools section that gives you the capabilities to look up any property and see if it is in a USDA eligible area.
These areas are not always rural or farm land, eligible USDA properties may be located in suburbs, that can be in rural areas and are typically outside of city limits. The United States Department of Agriculture - Rural Development has guidelines for areas to be considered rural, non-urban areas. June 4, 2018 USDA eligible areas were updated by the government and can be viewed on our eligibility map.
When in doubt, your loan officer will be able to assist you and your real estate agent on how to identify USDA eligible properties.
We provide a USDA Property Eligibility Map that you can use as a tool to look up various properties to determine if they are USDA eligible.
Additional USDA Eligibility Criteria
The two most important eligibility criteria are the income limits and property eligibility, however; we are going to touch on credit scores and loan limits in this section. Understanding how credit scores and loan limits work with USDA loans will give you a little more insight before moving forward with your home loan.
USDA Credit Eligibility
USDA does not require a minimum credit score to be eligible for the USDA Rural Home Loan; however, most lenders will look for a minimum of 620 – though lower may be eligible. If your credit score is under 640 then be prepared for certain loan adjustments, like a higher interest rate. Also, your loan may need to be manually underwritten and you will have additional conditions that needs to be met. The additional conditions might be a pain but remember that you are getting a home with zero money down! With other loan types the credit score must be higher, and you would be denied. If your credit score is under 640 ask you lender what are your options. The FHA loan is another loan type that will allow for scores under 640 and this may be an option for you.
Potential homebuyers must have a credit history that reflects a willingness to pay and meet financial obligations. Those with no credit score, or non-traditional credit, may also be eligible for a USDA Home Loan. In this case, your lender may ask for documents that include, but are not limited to, rental or housing payments, utility payment records, insurance payments or payments to retail locations. Your USDA loan specialist will be able to review your accounts and see if they will work as alternative tradelines.
USDA Loan Limits
USDA Loans have a maximum income limit for each County, however they do not have loan amount limits like FHA. The FHA Conforming Loan amount limit begins at $271,050 and varies based on County. Limits use the value 115% of the median home price in that area. In comparison, USDA does not have loan amount limits, rather they have income requirements and use debt to income ratios to determine your maximum loan amount.
USDA DTI, or debt to income ratios has 2 ratios. There is a frontend ratio, which calculates the borrower’s income compared to the mortgage (or housing debt). The frontend ratio, or top ratio can’t exceed 29%. Meaning only 29% of income can go towards the mortgage payment. The 2nd ratio is the backend ratio. This DTI ratio looks at your total debt and it cannot exceed 41%. This means that only 41% of income can go towards your total debt (includes mortgage payment and any debt appearing on credit report). However, higher ratios can be approved with certain compensating factors.