How do I qualify for a USDA Loan?
This question may asked by people on a regular basis by those looking for a no down payment home loan. The Department of Agriculture sets certain USDA loan requirements that must be followed and met by all loan applicants to get approved for a zero-down mortgage. In this article, people will learn exactly what is needed to qualify for Rural Development Loans.
A USDA home loan is a loan designed for people with both lower and moderate incomes, but applicants must be able to demonstrate that they can repay the loan before they will be granted the money. USDA loans use two separate debt-to-income ratios, called the “top ratio” and the “bottom ratio” to determine if an applicant will have enough income to qualify. The maximum debt-to-income limits for USDA loan approval can be broken down as follows:
- Maximum Top Ratio = 29% – This means that the projected new housing payment, including principal, interest, taxes and insurance, can not exceed 29% of the applicants total income.
- Maximum Bottom Ratio = 41% – This means that all of the borrowers current monthly bills and expenses, plus the new housing payment with principal, interest, taxes and insurance, can not exceed 41% of the applicants total income.
To prove that they meet income requirements, they will need to make copies of the following documents to present to the lending institution:
- The last two federal income tax returns
- The last two months paycheck stubs
- Credit card statements
- All of their current loan statements
- Retirement savings account statements
- Savings account and checking account statements
These documents will need to show that the applicants have an income high enough and a debt level low enough to afford the monthly payments. If applicants follow the steps outlined above, they should have their documentation ready when it comes time to meet a lender. The lenders will want to calculate the applicants’ debt-to-income ratio (DTI), and they will need the copies of the documents listed above. After all documentation is received, the lender will figure out how much debt the applicants currently owe as well as how much they will owe with a new housing payment, including principal, interest, taxes and insurance (PITI). For USDA home loans, lenders like to see this DTI figure below 41 percent, meaning that only 41 percent or less of the applicants’ monthly income would go toward paying new housing expenses and other debts they currently pay. They also will look to see if the new housing payment, with PITI, is less than 29% of the borrowers income. If the borrowers income meets the minimum debt-to-income requirements set forth by USDA Rural Development, it will then be checked against the maximum household limits for the area of the subject property. USDA provides a calculator for borrowers to determine their household income eligibility here.
Rural Development loans are for primary residences, so people will not be able to qualify if they wish to purchase rental property or second homes. The house must also be located in an approved rural area, as determined by the USDA. USDA loans were created to encourage growth and help people in rural areas afford better housing for themselves and their families. Therefore, applicants will need to check with the USDA to ensure that the home is in an area where USDA loans are granted. They only need to visit the USDA website, type in the address and they will be able to determine if the location of the property qualifies for a USDA Loan. If the property is located in an approved area, the applicant may then want to review the individual property guidelines for approval and ensure that it will pass a USDA-approved appraisal inspection.
Before going to a lender who offers the USDA home loan, hopeful homeowners will want to know their credit histories and scores because the lender will do a credit check. USDA loan requirements state that applicants must have credit scores of at least 580, however, a most lenders require a minimum FICO credit score of 620 or above for approval for any mortgage loan. This score demonstrates to the lenders that applicants take their financial obligations seriously and that they are likely to receive their money back. This means that the applicants’ credit histories may not contain the following:
- Two or more payments that are a month late in the last year
- A foreclosure in the past three years
- A bankruptcy in the past three years
- Any unpaid judgments
- Any federal, state or local tax liens
- Two rent payments more than a month late
- Recent collection accounts
With all of the USDA loan requirements, it is worth it to ask, “How do I qualify for a USDA loan?” By following the above guidelines and providing your lender with requested documentation in a timely manner, the process can go quickly and smoothly.