The USDA offers low and very low-income families a chance to become homeowners. Just like any other program, though, there are USDA loan restrictions you must know. They are nothing crazy and they do not prevent most people from securing a home loan. However, understanding the restrictions can help you make the most of your time searching for a loan.
Citizenship is Important
First and foremost, you must be a citizen of the United States. If you are not, you must have permanent residency. The loan is only for those residing in the United States and who purchase a primary residence. You cannot use the loan for second home or investment home purchases. The entire premise behind the program is to help those who would be unable to secure financing any other way to purchase a home.
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Maximum Income
There is such a thing as making too much money for the USDA loan. This is perhaps one of the largest USDA loan restrictions. Unlike other loan programs, if you make too much money, you do not qualify for the loan. This is because the USDA created the program to help families who struggle with their income. The USDA looks at eligibility income a little differently than other loan programs. In this case, they count your entire household’s income. This means anyone in your home that brings in money counts towards your eligibility income. You total their income and take off any allowances you are eligible to receive. The USDA provides allowances for every child in your home under the age of 18; children over 18 who are full-time students; disabled household members; and elderly household members over the age of 62. The allowances for every category except the elderly are $480; you receive $400 for every elderly person.
The Home’s Location
The other large USDA loan restriction is the home’s location. The program is only for homes located in a rural area. Don’t assume you know what rural means, though. The USDA changes the boundaries every time the US census changes. They focus on homes in areas that are not suburban and have a certain population. Checking with the USDA’s map can help you determine the eligible homes.
Personal USDA Loan Restrictions
There are a few USDA loan restrictions you personally have to meet. You cannot have any other means of purchasing a home. For instance, if you are eligible for an FHA loan, you cannot secure a USDA loan. The program is reserved for those who cannot get financing from any other program. By limiting the people who are eligible for the program, the USDA can afford to guarantee the loans for those who need it.
Credit Score Above 620
It helps if your credit score is above 620 for this program. Technically, you can have a score below 620, but your file will experience extra scrutiny. Many lenders prefer scores higher than 580, but some will take a lower score. However, you need other factors to offset the low credit score. This way the other factors offset your risk. For example, if you have a low debt ratio, meaning you have plenty of income to cover your new mortgage payment plus other monthly debts, you offset the risk of your low credit. However, lenders will look at your credit history. You should not have any collections filed against you within the last 12 months or you risk approval.
Debt Ratio Requirements
The USDA is not as strict as you think when it comes to debt ratio requirements. They allow debt ratios as high as 28 percent on the front-end and 41 percent on the back-end. This means your proposed mortgage payment cannot exceed 28 percent of your gross monthly income. It also means your total monthly obligations including the new mortgage payment cannot exceed 41 percent of your gross monthly income. However, the USDA does provide exceptions to these rules when you have other compensating factors as discussed above.
The remaining USDA guidelines are similar to any other loan program. The largest hurdles to get around are the home’s location and your household income. Once you know you are eligible for the program, qualifying is simple, especially since you do not need a down payment for this program.
