Like the Department of Veterans Affairs and the Federal Housing Administration, the United States Department of Agriculture (USDA) also provides a mortgage option – the USDA loan.
The USDA loan is a lesser-known mortgage program that allows eligible rural and suburban homebuyers to finance a home without a down payment.
To be eligible for a USDA loan, applicants must meet the basic eligibility requirements set forth by the USDA, which cover credit, income, property usage and home location.
Each factor plays a significant role in meeting the USDA’s mission of providing safe and sanitary housing for low to moderate-income families.
Minimum Qualifications for USDA Loans
At a minimum, USDA guidelines require:
- U.S. citizenship or permanent residency
- Ability to prove creditworthiness, typically with a credit score of at least 640
- Stable and dependable income
- A willingness to repay the mortgage – generally 12 months of no late payments or collections
- Adjusted household income is equal to or less than 115% of the area median income
- Property serves as the primary residence and is located in a qualified rural area
USDA Loan Credit Requirements
Applicants must show stable and dependent income and a credit history that demonstrates the ability and willingness to repay the loan.
There is no minimum credit requirement for the USDA loan. However, applicants with a credit score of 640 or higher are eligible for the USDA’s automated underwriting system. Applicants below the 640 mark may still be eligible, but they are subject to manual underwriting, which can mean more stringent guidelines.
To determine creditworthiness, we will review items such as:
- Credit score
- Repayment patterns
- Credit utilization
- Length of credit history
Applicants without established credit may still be eligible, but will require credit verification from alternate sources, such as rent payments, utility payments and insurance payments. Policies on this can vary.
USDA Loan Income Requirements
The USDA looks at four different income calculations throughout the loan process in determining a borrower’s income eligibility:
- Annual Household Income
- Adjusted Annual Household Income
- USDA Qualifying Income
- Repayment Income
At a minimum, the USDA requires that applicants have stable income that is verifiable and likely to continue. Lenders generally verify income by requesting two years of income tax returns and recent paystubs to look for consistent employment.
Annual household income is the total projected income of every adult member in the household. It’s important to note that every adult occupant’s income will count towards the household limit, regardless if they are part of the loan.
Adjusted annual income is calculated by subtracting acceptable deductions from your annual income, and is used to determine if you meet the program’s income restrictions.
USDA Loans and Income Limits
The USDA sets a maximum on the amount of adjusted annual income a household brings in at the time of the guarantee. This is to ensure the USDA’s intended recipients in the low to moderate-income group use the program.
The general USDA income limits are:
- 1-4 member household: $86,850
- 5-8 member household: $114,650
In order to adjust for regional differences, USDA income limits vary by location and household size. The USDA has a base income-limit set at 115% of the area’s median household income and compares your total qualifying income to the regional median to determine eligibility.
There is a big difference between USDA qualifying income and repayment income. Qualifying income is used to ensure borrowers meet income requirements, while repayment income reflects a borrower’s ability to repay the loan.
Lenders assess an applicant’s creditworthiness by calculating their debt-to-income ratio, or DTI. The USDA set a standard 41% DTI for USDA loans, which means borrowers spend no more than 41% of monthly income on debts.
It is possible to acquire a USDA loan with a DTI higher than 41%. But having a higher DTI ratio can mean tougher lending requirements. Guidelines and policies can vary.
USDA Loan Location Requirements
The USDA loan is designed to help those in rural areas purchase a residential home. Fortunately, the USDA’s definition of rural is generous and many suburbs qualify.
According to the USDA, rural areas are defined as open country, which is not part of an urban area. There are also population requirements that can reach up to 35,000 depending on area designation.
The agency’s broad definition makes approximately 97% of the nation’s land eligible for a rural development loan, which includes an estimated 100 million people.*
USDA Loan Property Requirements
The USDA loan’s goal is provide a safe and sanitary residence for low to moderate-income households. Through the USDA loan, eligible homebuyers can purchase, build or refinance a home.
To meet this goal, the USDA sets basic property requirements that protect homebuyers as well as lenders.
- A few of these property requirements include:
- The home must be used as the homebuyer’s primary residence
- The site must have direct access to a street, road or driveway
- The property must have adequate utilities and water and wastewater disposal
A final consideration is that the USDA loan cannot be used to purchase an income-producing property. However, if the property includes barns, silos, commercial greenhouses or livestock facilities that are no longer used for commercial operation, the property may still be eligible.
Other eligible property types include:
- New construction
- Manufactured or modular homes
- Condos or townhouses
- Short sales and foreclosed homes
The USDA loan program has helped thousands of borrowers achieve the dream of homeownership and continues to be one of the best loan options on the market today.
For more information contact Beth Goulet at [email protected] or 860-881-7392.
This information was gathered from the USDA website.