Living in a non-metropolitan area could provide you with more benefits than more available land. The U.S. Department of Agriculture provides a great mortgage program making it possible for families to own a home. This mortgage program is one of the most overlooked yet beneficial programs for homebuyers.
In short, eligible borrowers do not have to put money down on a home and they can secure low interest rates. In addition, the underwriting guidelines are flexible. This is all because the USDA created the program for low-income families. The goal of the program is to build up “lesser known” areas of the United States.
Here we will discuss how you can determine your USDA mortgage eligibility.
Determining Your Income
The first step to determine USDA mortgage eligibility is to look at your income. There are two ways to look at your income, though. The USDA determines your eligibility and your qualifications two different ways.
Eligibility Income – This is the income the USDA uses to determine if you are eligible for the program. It is not the income they use to qualify you for the loan. In this case, they look at the total household income. This includes anyone not on the loan. If your parents live with you or you have adult children who work, their income counts. Once you total up your household income, you can decrease it by the appropriate allowances. These include:
- $480 for every child under the age of 18 living with you
- $480 for every child over the age of 18 living with you who is a full-time student
- $480 for every disabled family member living with you
- $400 for every elderly family member living with you
Once you subtract the appropriate allowances, you have your household’s eligible income. You can compare the amount to the USDA income eligibility table to see if you qualify.
Qualifying Income – This is strictly the income of any borrowers on the loan. This is what the underwriters use to determine your debt-to-income ratio. It is also what they look at to determine the consistency of your income. The more stable your income and the lower your debt ratio, the higher your chances of approval. Lenders like to see a 2-year history at the same job with consistent income in order to qualify.
Debt Ratio Requirements
Just like any other loan program, the USDA loan has debt-to-income ratio guidelines. The general guidelines state that a borrower’s mortgage payment should not exceed 29% of their gross monthly income. In addition, the borrower’s total monthly debt should not exceed 41% of their gross monthly income.
There are exceptions to the rule, though. If you have a debt ratio that exceeds these guidelines and a credit score higher than 660, you may be eligible for a debt ratio waiver. This allows you to have a higher debt ratio. Each situation is up to underwriter discretion. It does not mean if you have a score higher than 660 that you can automatically have a higher debt ratio. The underwriter needs to look at everything to determine your ability to repay the loan.
When an underwriter determines your debt-to-income ratio, remember, he/she looks at the total housing payment. This includes:
- Real estate taxes
- Homeowner’s Insurance
- Mortgage Insurance
For your total debt ratio, they look at:
- Credit card minimum payments
- Car loans
- Student loans
- Any other installment loans
Credit Score Requirements
The USDA mortgage eligibility guidelines do state that a borrower should have a credit score of at least 640. However, there are exceptions to this rule. If you have a score above 640, you may have streamlined requirements to help you qualify for the loan.
If you have a score lower than 640, though, you may still qualify. A lower score requires an underwriter to use additional scrutiny on your loan file. For example, they may look back at several years of your credit history rather than just the last 12 months. They may also require a lower debt-to-income ratio in order to reduce the risk level of your loan.
In general, underwriters do not want to see any collections or judgments within the last 12 months. They also do not want to see any bankruptcies or foreclosures within the last 3 years. If you have unusual circumstances causing these issues, you may be able to obtain an exception after further review. At the very least, the underwriter will need a Letter of Explanation regarding the issues. He/she also needs to see that you recovered from the situation and have a positive credit history moving forward. You can prove you recovered by showing increased income and paying your bills on time.
Miscellaneous USDA Mortgage Eligibility Requirements
In addition to the above requirements, you must meet the following USDA mortgage eligibility requirements:
- You must be a US citizen
- You must not have decent or sanitary housing at the time of application
- You must not be eligible for any other financing program
- You must live in the home as your primary residence
These guidelines are set by the USDA and must be adhered to in order to qualify for the program. The USDA uses its own funding to guarantee these loans for lenders. In other words, they pay the lender back if a borrower defaults on their loan. They do so in order to provide decent housing to lower income families. This is why they have strict guidelines regarding who is eligible for the USDA program. They do not want people taking advantage of the program to secure financing that requires no down payment and has low interest rates.
If you think you have USDA mortgage eligibility, contact a few USDA lenders in your area. They will help you determine your eligibility. Once you know you can secure a USDA loan, compare the offers provided to you from several lenders. Each lender can charge their own interest rate and closing costs. Find the loan most affordable for you and move forward with the process to become a homeowner with a great financing program.