USDA Loan Programs: How Do I Qualify For A USDA Loan?

By Gustan Cho

Tree-in-a-Green-Field-Medium-iStock USDA Loan programs offer 100% financing.  A home buyer does not need to put any money down and can purchase a home with zero money down.  How about closing costs on the home purchase?  On any home purchase transaction, there are closing costs that a home buyer is responsible for.  However, a home buyer does not have to cough up any closing costs on a home purchase as long as he can get a sellers concession towards the home buyers closing costs.  In the event if the home seller does not want to give a sellers concession towards the buyers closing costs, the mortgage lender can give a lender’s credit towards the home buyers closing costs in lieu of a slightly higher interest rate.   If the home buyer can strategize the home purchase right, he or she can purchase a home with no down payment and no closing cost.  USDA loan programs do have a mandatory funding fee but the funding fee can be rolled into the balance of the mortgage loan.

100% Financing: No Down Payment Mortgage Programs

There are two government mortgage programs that offer 100% financing where the home buyer does not have to come up with any down payment on a home purchase.  USDA. loan programs offer 100% financing on home purchase but the property needs to be in a USDA approved location and the home buyer needs to qualify for the USDA Loan not just with credit and credit, the mortgage loan borrower cannot exceed a certain amount of household income in order to qualify.  If a home buyer is married and he or she is the only person on the USDA loan but his or her spouse is a wage earner but not on the loan, the spouse’s income will be part of the household income that is needed to qualify for the USDA Loan.  USDA Loan is offered by the United States Department of Agriculture’s Rural Development Single Family Housing Loan Guarantee Program and has been created to promote home ownership in rural and suburban areas throughout the United States.  USDA Loans are also referred as Rural Housing Mortgage Loans as well as Section 502 Mortgage Loans.

VA Loans

The second government loan program that offers 100% financing is the VA loan which is offered by the United States Department of Veteran Affairs and it is only available for members of the United States Armed Forces and its veterans.  VA loan programs offer 100% financing with no money down required by home buyers.  There is a VA funding fee that is mandatory but the funding fee can be rolled into the balance of the VA loan.  A 4% sellers concession from the home seller is allowed to offset and pay for the home buyer’s closing costs.

Advantages Of USDA Loan And How Do I Qualify For A USDA Loan?

How do I qualify for a USDA Loan?  First the location the property is located at needs to be approved by USDA.  To be qualified as a USDA location property,  USDA is the only agency that will deem whether the location is a USDA zoned location.  In general, to be classified as a USDA approved location, the location needs to be in a rural area or suburban area.  The USDA loan program offers 100% financing and no down payment is required by the home buyer.  There is an upfront USDA mortgage insurance premium just like FHA’s upfront mortgage insurance premium.  The upfront mortgage insurance premium is 2% and that upfront mortgage insurance premium can be rolled into the balance of the USDA Loan.  Just like FHA, USDA requires an annual mortgage insurance premium to be paid throughout the life of the USDA mortgage loan.  Unlike FHA’s 1.35% annual mortgage insurance premium, USDA’s annual mortgage insurance premium is only 0.40%, regardless of whether you get 100% financing or 90% financing.  USDA loan programs do not have maximum loan amounts like FHA loan programs where the FHA loan limits is capped at $271,000.  USDA offers 30 year fixed rate mortgage loans as well as USDA Streamline Refinance Mortgage Loans.

How Does USDA Loan Program Work?

USDA is not a mortgage lender but a government agency that insures private residential mortgage lenders originating and funding USDA Section 502 mortgage loans against default.  Just like FHA.  FHA is not a mortgage lender but insures FHA approved private mortgage lenders against default from FHA insured mortgage loan borrowers.  The purpose and goal of USDA is to encourage and stimulate home ownership in rural areas as well as underdeveloped areas in the United States.

Income And Credit Qualification Requirements For USDA Loans

Besides the property needing to be in a USDA location, the borrower needs to be qualified for USDA mortgage lending requirements.  The maximum debt to income ratios required is 28% front end ratio and 41% back end  debt to income ratios.  There is also a maximum income cap.  You cannot be making $500,000 per year and qualify for a USDA loan.  The borrower’s household income cannot exceed 115% of the county’s median income.  Maximum income requirements vary from county to county.  As mentioned earlier, if you are married and you are the only person going on the mortgage loan, your spouse’s income will be counted towards your household income even though she is not on the mortgage loan. You normally need a 620 FICO credit score to qualify.

USDA loans are only for owner occupant primary homes.

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