The USDA loan provides many benefits to borrowers with low to moderate income. If you qualify for this loan program, you do not need a down payment and your closing fees are often lower than any other program. Knowing if and when you should apply for a USDA loan can help you make the right choice.
The Home’s Location
First, you must purchase or refinance a home located in a rural area. If the home is not within the USDA boundaries, you will not qualify. The USDA only guarantees loans in the rural area. The homes in eligible areas change periodically. Every time there is a new US census, the rural boundaries change as they base it on population as well as city limits.
Your Income Matters
Another way to determine your eligibility is your household income. This is different than the income you use on your loan application. The USDA determines your eligibility based on the total income from everyone in your household. Whether you have just your immediate family members living with you or you have other household members, every person’s income counts. This includes children and the elderly – anyone who brings in an income.
If you want to determine your eligibility on your own, total everyone’s gross monthly income. This includes base income, commission, bonuses, dividends, and even rental income. You must disclose any income that any household member makes. From this total, you can subtract any allowances your family qualifies to receive. The allowances are offered based on the age and health of the household member. Children under the age of 18; children over 18 but a full-time student; and disabled household members all qualify for a $480 deduction. In addition, any family members over the age of 62 qualify for a $400 deduction.
Once you total your income and deduct the allowances, you have your eligibility income. You can compare it to the income allowed on the USDA chart. The chart signifies 115% of the average income for that area. If you make more than this amount, you do not qualify for the USDA loan.
Eligibility for Other Loans
Lastly, if you are not eligible for any other loan type, you should apply for a USDA loan. The USDA created this program to help those who would otherwise be unable to secure financing. This means if you have the qualifications for an FHA loan or even conventional loan, you cannot use the USDA program. You can determine your eligibility for those programs before looking at the USDA loan to make things easier. Basically, if you have at least 3.5% to put down on a home, decent credit, and an average debt-to-income ratio, you may qualify for another loan program. If, however, you do not have the money to put down and you don’t make more than the USDA income maximums, you may use the USDA loan to purchase a home.
Start Shopping and Then Decide
You might want to try shopping for a home before you decide on the USDA program. Remember, you are restricted to certain rural areas. If you find that you do not like any of the homes within the rural areas around you, it might pay to wait until you qualify for a different type of loan. On the other hand, if you already know you prefer rural areas, the USDA loan is a great place to start.
If you do apply for a USDA loan, the process is simple. It works much the same as any other loan type after the loan officer determines your eligibility. You must then provide your income documents, asset statements, and personal identifying information so the lender can pull your credit. Before you shop for a home, it pays to secure a pre-approval so you know how much home you can afford. This way you can stay within your necessary price range and make the loan process as simple as possible.