USDA loans offer attractive financing terms for low to moderate-income families. With no down payment, borrowers that don’t have adequate housing and are within the USDA’s income guidelines may qualify for this great financing option.
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Keep reading to learn how to make your USDA loan application as attractive as possible.
Meeting the Income Eligibility Guidelines
Before you apply for a USDA loan, you should determine if you meet the income eligibility guidelines. In other words, you need to see if you make too much money to qualify for the USDA loan. Because the USDA guarantees the 100% loans for lenders, they reserve the program for those within 115% of the median income for the area.
You can see if you meet the income guidelines here. After you choose your state and county, you’ll enter your total household income. Notice, we said total household, not total borrower income. The USDA looks at the income of every adult living in the home to determine USDA income eligibility.
The USDA does offer allowances for certain situations as follows:
- Any children under the age of 18, subtract $480 per child
- Any children over the age of 18, but in school full-time, subtract $480 per child
- Any adults over the age of 62 living with you, subtract $400 per adult
- Any disabled household members living with you, subtract $480
The income derived after taking the applicable allowances is your eligibility income. You must be within 115% of the area’s median income to be eligible for USDA financing.
The Minimum Credit Score
If you meet the USDA’s guidelines, it’s then up to you and your co-borrower (if you have one) to qualify for the loan starting with the credit score. You need at least a 640 credit score to qualify. Lenders look at all three credit scores for each borrower from Trans Union, Equifax, and Experian. They take the middle score for each borrower and compare them against one another. The lowest score between the two is what they use for qualifying for a USDA loan.
Using Non-Traditional Credit
If you don’t have enough of a credit history to have a credit score, you may use non-traditional credit. Any bills you pay on a regular basis, but that don’t report to the credit bureaus can be used as non-traditional credit.
A few examples include:
- Rent to a landlord
- Insurance payments
- Utility payments
- Cell phone payments
- Child care tuition
You’ll need to provide proof of 12 months of on-time payments, so choose credit that you pay regularly. Each lender differs in the types of non-traditional credit that they will allow, so be sure to check with your lender.
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The Maximum Debt Ratio
The USDA offers flexible debt ratio guidelines for both the front-end and back-end ratios:
- Housing ratio – This front-end ratio is the comparison of your potential mortgage payment to your gross monthly income. The USDA allows a housing ratio of 29%.
- Total debt ratio – The back-end ratio is the comparison of your total debts (including the new mortgage) to your gross monthly income. The total DTI includes any debts that report to the credit bureau, such as credit cards, car payments, student loan payments, or installment loans. The total DTI can be as high as 41% of your gross monthly income.
The Employment Requirements
The ‘magic number’ for your employment history is two years, but don’t take that at face value. While lenders and the USDA would love it if you were at the same job for two years, don’t let that stop you from applying for a loan.
Lenders look at your two-year history to make a decision. They look at the jobs you’ve had during that time and how they relate. Did you work within the same industry for the last two years? If you changed industries, do you have an educational history in the new industry that will strengthen your success? The big picture is what lenders use to determine your likelihood to succeed (aka pay your mortgage).
Compensating Factors
Looking at the above requirements, you might worry if you don’t meet one of them. For example, let’s say your total debt ratio is 43%. Does that automatically disqualify you?
Luckily, the answer is ‘no.’ If you can show the lender that you have factors that compensate for something ‘risky’ such as a high DTI, you may still secure approval. A few examples of compensating factors include:
- Putting money down on the home even though the USDA doesn’t require it
- Have a credit score much higher than 640
- Have a debt ratio lower than the USDA requirements
- Have money in savings that you can use for reserves if your income stopped
Paying the Closing Costs
One last way to make your USDA application as attractive as possible is to prove that you have the money to pay the closing costs.
This doesn’t mean taking money from a relative or friend and throwing it in your checking account to get approved for the mortgage. Instead, it means showing the lender that you have the money in your own account and that it’s been there for at least two months. Any large deposits you’ve made within the last two months will need a paper trail to prove that you don’t have any outstanding loans.
With all of these documents and qualifying factors, you can typically get a USDA loan approved and to the closing table within 30 to 45 days. The USDA offers a flexible loan program that makes it possible for low to moderate-income families to afford a home.
