Updated Rules and Mortgage Requirements for USDA Home Loans

If you have lower income and credit and want to buy a home in a rural area, a USDA loan could be for you. USDA home loans are backed by the USDA, which means they will pay back the lender if you do not pay.

USDA home loans feature such benefits as 100% financing, affordable payments, low credit score eligibility and affordable interest rates. These loans are getting more popular today; many of the 100% financing home loans went away after the mortgage crash. The USDA program is one of the few 100% financing programs available in 2018.

According to the USDA website, there are specific requirements for this program. One of the most significant is the property needs to be in a USDA eligible area. Borrowers can look at the maps at the USDA website to see if the home you want is in a rural area.

If you assume your home is not eligible, keep in mind that 97% of the land mass of the US is eligible for one of these loans, where more than 109 million people live. Even some properties in suburban areas may qualify. It is always worth checking the USDA website to see if your home is in a rural zone. As of today, the USDA eligibility maps are still based upon Census statistics from 2000. So, more home may qualify for the program than you think.

Advantages of the USDA Mortgage Program

The USDA website notes the biggest benefit of this program is that you do not have to put any money down. You can get 100% financing. Even the excellent FHA program requires a 3.5% down payment, which adds thousands of dollars to your expenses up front. Having to put down no money up front makes it possible for millions of Americans to buy a home who would not otherwise be able to do so.

Second, the loan is guaranteed by USDA. This means if you default, the USDA pays the lender back., This is important because it means the risk for the lender is lower. Lenders are more willing to offer low interest rates and zero down programs when their money is guaranteed.

Credit score requirements are higher than for FHA loans. As of 2018, you need to have a credit score of 640 to qualify for the USDA loan program. It is possible that you can qualify with a lower score if you have money to put down or have other attractive features to your application.

Regarding debt ratio requirements, you need to have ratios of 29% and 41%. This means your total monthly house payment cannot exceed 29% of your gross monthly income, and your total monthly debt obligations cannot exceed 41% of your gross monthly income.

It is possible for these ratio requirements to be overridden where a live person goes over the file and determines if you can get a higher ratio.

Other USDA Loan Features

Regarding closing costs, USDA's site says that you can have the seller pay closing costs if they agree to, up to 3% of the sales price. Borrowers also can get gift funds from people in the family if they agree that the money is a gift and not a loan.

USDA home loans also allow you to open the loan for the full appraised value, even if it is above the purchase price. If you have a loan that is more than the purchase price, you can use the extra money to finance closing costs.

USDA home loans are provided to people with moderate incomes. This is defined, according to the USDA website, as those who earn up to 115% of the area's median income. So, a family of four that buys a house in Orange County CA can earn as much as $111,000 per year. For most Americans, the income limits are generous. Moderate earners often find that they can qualify for USDA loans.

One thing to keep in mind that the only loans that are offered for USDA are 15-year and 30-year fixed rate loans. These are the safest loan programs. Adjustable rate loans are not an option. The website states that you can have a 33 year pay back period in some cases, and some may even qualify for 38 years if they have very low income.

Regarding interest rates, USDA loans usually have rates that are lower than market rates. People who choose USDA loans usually have lower monthly payments compared to conventional and FHA loans. Even if you do not have credit history, you still may be able to qualify for this loan. You can use alternative proof of credit such as rental history, insurance payments and utility payments to qualify.

USDA's Direct Home Loan Program was created for rural neighborhoods of 20,000 people or less, offers financing to qualified borrowers that are not in a position to meet the qualifications for conventional home financing. Applicants do not need to come up with down payment and the interest rate could be as low as 1% with potential subsidies.

USDA loan applicants must meet income and credit criteria, demonstrate the ability to make the monthly mortgage payments and take a homeownership education course through USDA.

The maximum USDA loan amount for repair is $20,000 and can be used to improve or modernize homes and do essential repairs. Grants of $7,500 are available to homeowners 62 and older and must be used to remove health or safety hazards. Qualified USDA loan applicants have until the end of September 2018 to submit their application.

The bottom line is the USDA loan program is a great deal with 100% financing for people with moderate incomes who want to buy in a rural area.