What is a USDA Loan?

by on July 22, 2012

What Is a USDA Loan?

USDA home loans also go by the name of USDA rural development loan, and it is a way in which U.S. residents can purchase a house without having to offer a down payment. These U.S. government-insured loans offer even more advantages to those who qualify, because the closing costs are guaranteed to be paid either by the seller or by the purchaser by adding these costs to the loan. Furthermore, USDA home loans are entitled to the lowest interest rates that offer homeowners a fixed monthly payment that never adjusts to a higher amount.

USDA Loan Requirements

Before people can apply for a USDA mortgage, they will need to meet the USDA loan underwriting requirements. Applicants will need to be in good financial standing before they apply for a USDA mortgage. If they have instances on their credit reports where they have had difficulties paying their bills on time, these may not necessarily disqualify them from USDA loan qualifications. If they have maintained a positive credit history for at least the past 12 months, these late or missed payments may be disregarded.

Those whose accounts have gone to collections will want to resolve these debts before closing, or they may not qualify for the USDA mortgage. Lenders are expecting those seeking a USDA rural development loan to have a FICO score of at least 620.

Income Requirements

To demonstrate that they qualify for the USDA rural development loan, people will need to present evidence that they have worked for at least two years or have had an income source for at least this long. The lenders will examine their debt-to-income ratios, and USDA loans use a 29:41 ratio. However, lenders may be able to qualify those who have a higher ratio if they have a credit score of 660 or above.

Unless they are granting an exception, borrowers will need to show that their monthly housing expenses are less than 29 percent of their monthly income. This will include the mortgage payment, the home insurance payment and the amount they pay in property taxes. The 41 percent ratio pertains to the applicants’ debts plus the new housing expenses and the amount of monthly income going toward debts can not exceed this number.

Is the property located in a USDA Rural Area?

To be eligible for USDA financing, future homeowners need to purchase a home in an approved area rural area for this type of home loan. Not all counties in the U.S qualify for USDA loans but many of them do.  Applicants can find out exactly what areas are eligible through the USDA website.

This post was written by...

– who has written 7 posts on USDALoans-101.

Spencer is mortgage insider and expert in home finance.

Contact the author