The USDA loan has the reputation of being only for low-income borrowers. While it is a good program for borrowers that don’t have enough income to qualify for another loan program, they aren’t the only candidates. The USDA loan is a good loan for many others.
Keep reading to find out if you may qualify.
The Income Requirements
First, the USDA loan is for anyone that makes 115% of the average income for the area (or less). But there’s more to it than that. The USDA doesn’t just count the income of the borrower and co-borrower. They count the household income. This means anyone over the age of 18 that makes an income in your house must disclose their income.
The USDA uses this total to confirm if you are eligible for the program or not. But, there’s an exception. If you have children that live with you; disabled household members; or elderly household members, you get an allowance. The allowance is as follows:
- Children under the age of 18 – $480
- Children over the age of 18 but in school full-time $480
- Disabled household members – $480
- Elderly household members $400
You can deduct the appropriate allowances from your total household income to come up with your eligibility income (monthly). If you fall within the allowance for your area, you are eligible for a USDA loan.
The Type of Property
Even if you meet the income eligibility requirements, you have to meet the property requirements as well. First, you must buy a property that the USDA considers rural. This may be a little different than what you consider rural, though. The USDA uses the latest census tract and chooses the areas that have a small population as the rural areas. Oftentimes, they are right outside of the city limits and not in the middle of a cornfield as you probably imagine rural properties look like.
Qualifying for the USDA Loan
Now, even if you have low enough income and you find a rural property, it still doesn’t guarantee you a USDA loan. You have to qualify for the loan. This pertains to just you and the co-borrower (if you have one).
You must meet the following requirements:
- You’ll need at least a 640 credit score
- Your housing ratio should not be higher than 29% of your gross monthly income
- Your total debt ratio should not be higher than 41% of your gross monthly income
- You must live in the home as your primary residence
- The home must be adequate for your family
- The home must not be ‘luxurious’ or excessive
- You must not qualify for any other loan program
If you qualify, you can receive up to 100% of the purchase price of the home. This means that you don’t have to come up with a down payment. You will have to pay the USDA fees, though, which include an upfront mortgage insurance fee as well as monthly mortgage insurance. Today, USDA borrowers pay 1% of the loan amount upfront and 0.35% of the loan amount per year, but on a monthly basis.
For example, on a $100,000 loan, you would pay $1,000 at the closing for the mortgage insurance. You would then pay $350 per year or $29 a month for the annual mortgage insurance. The USDA charges the mortgage insurance for the life of the loan. Even after you owe less than 80% of the home’s value, you will still pay the mortgage insurance.
You don’t have to be a low-income borrower to get a USDA loan. What you need to be is a borrower that can’t qualify for an FHA or VA loan and that doesn’t exceed the USDA income guidelines. The USDA loan makes it easier for borrowers to purchase homes in rural areas in an effort to increase the economy in those areas.