USDA loans have many requirements for eligibility despite their track record as being an “easy loan.” This program provided by the government enables people with low to moderate-income to become homeowners as long as they purchase a property within the USDA boundaries and have a household income that meets the low requirements for their region. Understanding how to qualify for this program will help you determine if you should start there or work with another loan, such as the FHA or conventional programs that are available.
Credit Scores are Important
As with any mortgage product, credit scores determine whether or not you are eligible. Your credit score is not the only driving factor for USDA eligibility, but it does provide some guidelines as to who should bother applying and who should not. In general, a credit score as low as 580 can apply for the USDA loan; however, the agency prefers a score over 620 for a more streamlined process. In the event that your score is below 620, you will have to prove your worthiness of the loan, namely you cannot have any late housing payments in the last 12 months in order to qualify.
Income must be Low
In order to qualify for the USDA program, you must not make a lot of money in relation to the median income for your area. Every county within a state has its own median income – if you make more than 115 percent of that amount, you are not eligible. The total household income derived for your family, however, is based not only on the gross amount of money you bring into the home but on the adjusted earnings, which is the total gross minus any allowances you are eligible to receive. The allowances include:
- $480 for any children younger than 18 years old
- $480 for any full-time students older than 18 years old
- $480 for any disabled relatives living with you
- $400 for any elderly relatives living with you
The income you must report includes any salaries, commissions, bonuses, part-time incomes, social security, disability, alimony or child support.
»Get Matched with a Lender, Click Here»
Property Must be in an Eligible Rural Area
The USDA program was created to stimulate certain areas of the country that would otherwise remain underdeveloped. Because of this, the home you purchase or refinance must be located within the rural boundaries set forth by the agency. A large portion of the United States falls within these boundaries, so it is worth investigating whether or not your area qualifies. This home must also be your primary residence – you cannot use this financing method for investment, vacation, or second homes.
In addition to its location, however, is the need for the property to be modest. This means it cannot exceed the maximum USDA loan amount for your area. The program was put into place in order to provide safe and sanitary housing for families – not to provide exquisite housing arrangements for those that can afford it. Aside from the requirement that the home must be modest, it cannot be used for any income production and it also cannot have an in-ground pool in order to qualify.
Upstanding Citizen Requirements
You must be a legal citizen or qualified alien in order to obtain this mortgage product as well. This can be determined based on your employment records or official documents, such as a Green Card. In addition, you must not be in disaccord with any federal programs when you apply for the loan. The most common example of a situation like this would be a citizen that has an outstanding and unpaid federal tax lien. If the lien is not satisfied before the loan application, you would be ineligible for USDA financing.
Reasonable Debt
As with any mortgage product, your debt ratio plays a role in your eligibility for the USDA loan. In general, ratios of 29 percent up front (total mortgage payments) and 41 percent on the back (total mortgage payment plus all other debts) are the limits, but there are exceptions to the rule. If your credit score is over 620, you may be able to get an exception granted for you if you can prove that you can afford the higher debt ratio and stay in good standing with your mortgage payments. This is determined on a case-by-case basis and will be made by the lender itself as your entire loan file helps to determine your qualifications.
Overall, USDA loans are easy to qualify for and provide people with low incomes to have suitable housing. As long as you are willing to look in rural areas and purchase a “modest” home, you can have financing that has affordable terms and even provides certain types of assistance, if you need it with its Direct program.
