USDA loans are 100% loans with flexible guidelines. They allow you to buy a home in a rural area easily. The USDA began the program to build up small, rural areas. Today, those rural areas are much more common. You might be surprised to find the areas considered rural near you. While the program is flexible, there are ways you can ruin your USDA loan eligibility. Here we will show you which factors are the most important.
High Household Income Affects USDA Loan Eligibilty
The USDA loan is the only program that looks at household income. Anyone who lives with you that makes money matters here. The only income that does not count is income from anyone under the age of 18. The USDA asks for proof of each household member’s income. They total the gross monthly income of each occupant. From that amount, they deduct any applicable allowances. They are as follows:
- Children 18 and under – $480
- Children 18 and over and a full-time student – $480
- Elderly residents over the age of 62 – $400
- Disabled residents – $400
After deducting the allowances, the USDA compares your household income to the area’s allowed maximums. If the number exceeds the allotted amount, you would not meet USDA loan eligibility requirements. Yes, you can make too much and not qualify.
Property in the Wrong Location
As we discussed above, the USDA loan is for rural properties. A quick glance at the USDA map will show you the rural areas near you. Make sure you zoom in on the map, as there are certain areas where one part of the street is rural and the other is not. It depends on the boundaries and the latest census tract. Buying a property not in the eligible areas will leave you with USDA funding as an option.
Owning a Home Already
The USDA program is for borrowers who cannot secure suitable housing. If you already have a home, but plan to sell it, you will not be eligible. The USDA program is only for borrowers who would otherwise have to rent if they don’t have USDA financing.
Qualifying for Another Loan Program
USDA financing must be your only option for a loan. For example, if you qualify for conventional financing, you cannot use USDA financing. The USDA created the program for low-income families that cannot secure housing any other way. Borrowers who can secure other types of financing do not need the 100% financing option. The USDA is a self-funded program, so they must limit who qualifies for the program. If borrowers who don’t need the funds use it, they can use up the available funds. This may leave nothing for those who really cannot get financing anywhere else.
Poor Credit History
The USDA loan has flexible guidelines. They do not have high credit score requirements. Right now, borrowers need a 640 credit score to qualify. This is considered fair or poor credit according to many lenders. However, lenders still look at your credit history. Even if you have a 640 credit score, but many late payments on your history, you may not qualify. Lenders look for timely payments over the last 12 months. If you have more than 1 late payment, you may qualify, but only with a proper explanation. It is then up to the lender if they want to grant the exception. The USDA will also have a final say in the approval.
Defaulting on any type of federal loan, including income taxes, can leave you ineligible for the program too. The only way around it is to set up a payment plan with the government. You must then prove you make your payments on time with this debt. The USDA will also include the debt in your debt ratio to make sure you can afford the new loan.
High Debt Ratio
Like most other factors on the USDA loan, the debt ratios are rather high. The maximum debt ratios equal 29/41. This means 29% of your gross monthly income can cover your housing payment. It also means 41% of your gross monthly income can cover your total monthly debts. If you have higher debt ratios, you may qualify if you have compensating factors. These vary by lender, but a few common ones include:
- High credit score
- Money down on the home despite the 100% LTV allowance
- Stable employment
No Cash for Closing Costs
Generally, USDA borrowers do not pay closing costs out of their own pocket. They have other options, such as:
- Seller contributions – Sellers can contribute up to 3% of the sales price of the home to help with closing costs. They cannot pay more than the actual closing costs, though.
- Gifts – Relatives can provide gift funds to help pay the closing costs. The funds should not exceed the actual cost of the closing costs.
- Wrapping the costs into the loan – Borrowers can take out a loan for up to 100% of the appraised value. If the appraised value exceeds the sales price, you can wrap the closing costs into the loan up to 100% of the home’s value.
If you do not fall into any of these categories, you must pay the closing costs out of pocket. This means you must provide proof of the funds. Lenders usually require a few months’ worth of bank statements to prove you have the funds. They look for large deposits. This could signify that you borrowed funds from someone else. If you do not have the assets to cover the closing costs, you may not be eligible for the loan.
If you meet the above requirements, you may meet the USDA loan eligibility requirements. It is a fine line between being eligible and ineligible. You can make too much or not enough to qualify for the program. You may qualify for other programs or not find a rural home. Any of these things can make you ineligible. Knowing the guidelines, you can determine if USDA financing is right for you.