USDA loans offer a great way to purchase a home in a rural area with an easy to qualify for loan program and low costs. The program began to help potential homeowners that fell into the low to middle income bracket become actual homeowners. Today, that means that any potential borrower cannot make more than 115 percent of the average income for the area in order to qualify. Aside from the income and property location guidelines, the USDA has debt ratio requirements, just like any other program. The standard maximum ratios are 29% for the housing payment and 41% for total debt. There is a possibility of applying for USDA loan debt ratio waivers, however, if your ratios are higher than the standards they accept. Typically, this is an option if your credit score is above 660 and if you have unique circumstances; a few examples include income that might not be able to be used because it is part-time or seasonal or if you are due to receive a promotion in the near future.
What is a Ratio Waiver?
The loan debt ratio waiver enables you to apply for a USDA loan with an exception; that exception is a higher debt ratio, whether it is the housing ratio, total ratio, or both. In order to apply for the ratio, you have to be able to provide acceptable compensating factors to make up for the risk level your higher debt ratio provides. The compensating factors must be properly documented and meet the requirements of the USDA as well as the individual lender.
In order to get your higher debt ratio accepted, you have to be able to prove that you have certain compensating factors. Along with these factors, however, is the need to provide proper rationale for accepting the higher ratios. For example, it is not enough to state that you have 6 months’ worth of reserves on hand so you deserve to have a higher debt ratio. You need to prove to the lender that you have the higher ratio because of specific circumstances, such as being a co-signor on a loan that someone else has a history of paying or being involved in a divorce that will leave you with fewer debts down the road. Following are the most commonly accepted compensating factors:
- A history of paying higher housing payments than the new USDA loan will provide, even though the housing debt ratio exceeds the standard 29%.
- Putting a down payment on the home, even though the USDA loan does not require one. Typically a down payment of 10% is considered a compensating factor.
- Possession of a savings account that has a significant amount of money in it compared to your monthly housing payments can help. This is called reserves and is determined based on the number of months you could pay your new housing payment with the savings.
- A small percentage of your available credit outstanding can serve as a compensating factor. Typically, a maximum of 30% of your available credit outstanding is the maximum amount for a compensating factor.
- Only a slight increase in your housing payment that brings your debt ratio slightly higher than before with a positive housing history for the last 12 to 24 months.
- Evidence that your credit history up until the date of the application for the USDA loan was comprised mainly of your housing payment rather than any other type of debt.
- Proof that you have been trying to better your professional opportunities by going to school or taking professional training in order to be eligible for promotions or better paying jobs.
- If the borrower is moving because of a job relocation and there is evidence that the co-borrower, or secondary wage earner, has the ability to find a job in that area and contribute to the household income once the move is complete, it can serve as a compensating factor.
USDA loan debt waivers are approved on a case-by-case basis and typically require manual underwriting in order to determine if you are eligible. The best way to ensure that you get approved is to provide as many compensating factors as possible and to minimize the amount your debt ratio exceeds the USDA standards. You can do this by paying down current debt (the USDA allows this in order to decrease your debt ratio); gathering evidence that a particular debt, such as student loan debt, is deferred for at least 12 months; or providing proof that a contingent liability is paid by the intended party, rather than yourself over the last 12 to 24 months.
If you fall within 115% of your area’s median income and wish to purchase a home in an area the USDA considers rural, which can be found on their website, the USDA loan program is a viable way to obtain affordable financing.