A zero down payment loan seems too good to be true, doesn’t it? Luckily, it is true with the USDA Rural Home Loans. This program started by the USDA helps low-income families secure sanitary and safe housing. There are several restrictions include in this program, but families that meet the requirements do not have a hard time securing an approval.
The Location of the Property
The largest and possibly hardest requirement to meet is the property location. The loan program is for rural properties. This does not mean way out in the country where no one can find you, though. It means rural as determined by the USDA. You can see which properties they consider rural, by visiting their website. If you can find a home within the designated boundaries, you are halfway to securing a USDA loan.
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Your Total Household Income
The USDA looks at income in two ways – eligibility income and qualifying income. Here is the breakdown:
- Eligibility income – This is the total income of your household. This means any aunts, uncles, siblings, parents, or adult children who live with you must include their income. This is how the USDA determines if you are eligible for the loan program. They recognize that multi-generational households have multiple people paying the bills. This is why they need to determine your household income to see if you qualify. If your household makes too much money for the area, then you will not qualify.
- Qualifying income – This means strictly your income and that of any co-borrowers. Only the people on the application can include their income for these purposes. This is the income that helps determine your debt-to-income ratio and if you can afford the loan. The lender can use the eligibility income as a compensating factor if your debt ratio is close to the allowed ratios.
We are going to complicate things a little more here, though. Your eligibility income is not what it seems at face value. If you have any of the following in your home, you have some allowances you can take on your eligibility income:
- Children under the age of 18 living with you
- Children over the age of 18 living with you that are full-time students
- Disabled relatives living with you
- Elderly relatives living with you
The USDA has allowances for each of these categories. Children, whether under 18 or over 18 and a full-time student as well as disabled relatives provide you with a $480 deduction off your monthly income. This is per person.
Any elderly people living with you provide you with a $400 deduction off your monthly income. Again, this is per person.
Let’s look at an example:
You live in a house with your two children, ages 8, 10, and 19 as well as your husband. Your husband’s mother who is 80-years old also lives you. Your 19-year old child attends college full-time. You can take your total household income and subtract $1,840 – $480 for each child and $400 for your mother-in-law.
The USDA compares the total household income to the average income in your area. You cannot exceed this amount by more than 115%. If you do, you are not eligible for the program. Any amount below 115% of the average for the area may qualify.
The Qualifying Factors for USDA Rural Home Loans
Just like any other loan program, there are credit score and debt ratio requirements you must meet. These include:
- Your credit score should not be below 640. However, if it is, you may still qualify for a loan. The underwriter will have to use extra scrutiny on your file, though. This is according to the USDA. They want to make sure you do not have a pattern of making late payments or have periods of the year where you cannot pay your bills due to seasonal employment or any other issues. A credit score of at least 640 allows the lender to perform a streamlined process on your loan, though.
- Your debt ratio should not exceed 29/41. This means the housing payment should not total more than 29% of your gross monthly income. Again, this is just the income of any borrowers on the loan. Your total monthly debt, which includes any credit card payments, student loans, or car loans, cannot exceed 41% of your gross monthly income. However, there are ways to secure a debt ratio waiver. If your credit score exceeds 640 and your debt ratio is slightly higher than 29/41, you may secure a waiver for a higher DTI.
No Down Payment
USDA Rural Home Loans do not require a down payment. This helps many borrowers purchase a home as saving for a down payment is often the hardest part. With no money down required, you can borrow up to the full amount of the appraised value. This means even if the purchase price is less than the appraised value, you can borrow as much as the value of the home. This way you can wrap the closing costs into your loan. It is possible to purchase a home with a USDA loan without bringing a penny to the closing table!
Even if you cannot wrap the closing costs into the loan, the USDA allows you to accept help from others to pay the closing costs:
- Sellers can contribute up to 3% of the purchase price to help you pay for the closing costs
- Friends and relatives can provide you with gift funds to pay your closing costs
USDA Rural Home Loans are not meant to be difficult to obtain. The hardest part is qualifying with your total household income. Once you know you meet the income requirements, the rest are easy to meet. The USDA does have the final say in whether you can obtain USDA funding though. Keep that in mind when you sign a purchase contract. The USDA office typically takes a week or two to provide final approval. Your lender cannot close on your loan until they have that approval though. The easiest way to speed things along is to provide all of the necessary documents right away so the lender has a complete package to evaluate and send off to the USDA.