USDA Home Loan Requirements

USDA Home Loan Requirements

USDA Home LoansIn this guide on USDA loans, we will discuss all the USDA home loan requirements for borrowers and the type of eligible properties.  USDA offers homebuyers the chance to purchase homes in rural or suburban areas that are designated as areas by the United States Department of Agriculture.

Only certain areas in the country are eligible for USDA mortgage loans. USDA loans are only eligible in certain rule areas.

Homebuyers must qualify for USDA home loan requirements to be eligible for USDA loans. Mortgage lenders offer 100% financing to qualified homebuyers in USDA-designated areas in the United States. In the following paragraphs, we will discuss all the ins and outs of USDA home loan requirements for borrowers, property, and the area eligible for USDA loans.

Are USDA Home Loan Requirements Hard To Get Approved?

Suppose a homebuyer can structure their home purchase with a seller concession where the seller will offer a seller concession towards the buyer’s closing costs. With seller concessions, the buyer can purchase a home with zero money out of pocket.

In the event, a homebuyer is short with the seller’s concession towards their closing costs, the home buyer can get a lender’s credit towards the closing costs of the home loan.

There is no down payment on a home purchase with a USDA loan. The closing costs can be covered 100% with the seller’s concession from the home seller. A lender’s credit is when a mortgage lender gives a borrower funds to cover most of their home closing costs in place of a higher interest rate. USDA Loans are extremely popular in many parts of the country.

USDA Home Loan Requirements For Eligible Properties

To be eligible for a USDA loan, the property needs to be in a USDA-designated area. The USDA loan applicant needs to be qualified and meet the minimum credit scores and maximum front-end and back-end debt-to-income ratio caps. USDA mortgage lending guidelines differ in a way that is different than other mortgage lending programs because they have a maximum household income limit. The maximum household income cap depends on the areas median income and the number of people in the household.

USDA Home Loan Requirements on Household Income

There is a maximum household income cap on USDA loans. The household income limit depends on the county the property is located in. If a married applicant goes on the mortgage loan alone without the spouse, the spouse’s income is counted as part of the household income. The non-borrowing spouse’s income is counted even though the spouse is not on the mortgage note. Other factors come into play, as well as the number of dependents. Maximum front-end debt-to-income ratios are capped at 28%, and the maximum back-end debt-to-income ratios are capped at 41%.

How Much Do I Need To Buy a House With a USDA Loan

It is no secret that buying a house in the latter part of 2023 is very difficult. The Federal Reserve raised interest rates for the sixth time this calendar year alone. These are the highest and sharpest rate hikes in multiple decades.  Unless you are a veteran who bravely fought for our country, you will more than likely need a down payment to purchase a home. However, there is a little-known mortgage program that does not require a down payment.

Can I Buy a Home With No Down Payment and No Closing Costs With a USDA Loan?

While the intention of the rate hikes is clear and precise to combat inflation, the results are much different.  Many clients struggle to find a down payment to purchase a house. Then, you must factor in the additional closing costs. You can get up to a 6% seller concession or lender credit to cover closing costs on a home purchase with a USDA loan.

What Area Are USDA Home Loans Eligible?

USDA Home Loans are offered in rural areas and are funded by the United States Department of Agriculture. This blog will discuss a USDA mortgage, some basic qualifications, and how to apply for a USDA loan with Gustan Cho Associates.

The benefit of a USDA loan is no down payment is required.  Since no down payment is required on USDA loans, the qualifyication is stricter than conventional or FHA loans.

We want to inform our readers that the United States Department of Agriculture is more than just a food and safety organization. When you go to the grocery store, you may see things like USDA cuts of meat or USDA-certified organic produce, but you will not see information on a USDA mortgage loan.

USDA Loans Versus Conventional Loans

USDA loans are not as popular as conventional or FHA mortgage lending but can offer you a clear path to home ownership. USDA‘s mission statement is helping families in rule areas become homeowners. A USDA loan is a program for low to moderate-income families for a home purchase.

A USDA loan offers competitive interest rates and helps the homebuying process become more affordable for low to moderate-income individuals in designated rural areas.

For a VA mortgage loan, the United States Department of Agriculture will directly back the mortgage like the United States Department of Veteran Affairs. Because of this federal government backing, mortgage lenders typically offer more competitive interest rates than conventional financing.

USDA Home Loan Requirements on Eligible Properties and Areas

USDA loans are only eligible in rurally designated areas by the United States Department of Agriculture. The Department of Agriculture promotes USDA loans in rurally designated areas to promote homeownership for lower to moderate-income families.

The good news is the United States Department of Agriculture mortgage department has an easy-to-use interactive eligibility map to make sure a home is eligible for USDA financing.

Here is a link to this map.  You will type in the full address to see if the property in question is located within the geographically eligible area. Even if the home is in a designated area, USDA strongly recommends that you reach out directly to them to verify double. This interactive map is a great tool but not always 100% accurate.

USDA Home Loan Requirements on Occupancy and Household Income

Residency -To utilize a USDA loan, you must be a legal resident of the United States, a non-citizen national, or a permanent resident alien. For more information on residency qualifications, please get in touch with Gustan Cho Associates today.

Income limits – Income limits are key critical when qualifying for a USDA mortgage loan.

Since USDA loans are geared toward low to moderate-income families, your mortgage lender must verify your adjusted gross income. Your adjusted gross income cannot exceed 115% of the median income in your area median. There is an easy-to-use income eligibility tool on the USDA website. This will show you the median income where you want to purchase a home.

USDA Mortgage Underwriting Guidelines on USDA Loans

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Assuming you meet the income limits, underwriting must verify you have a stable source of income to make future mortgage payments. Based on your credit report, an underwriter will want a clean payment history for the previous 12 months. While late payments are not necessarily a disqualifier for FHA mortgage loans, payment history is incredibly strict with USDA mortgage lending.

USDA Home Loan Requirements on Debt-To-Income Ratio

Many clients ask if there are debt-to-income requirements with USDA mortgage lending. The short answer is yes. Your debt-to-income ratio is a qualifying factor for a USDA mortgage loan. The general recommendation is your debt-to-income ratio should not exceed 43% of your adjusted gross income. While it is possible to go above this number, it will all be part of the automated underwriting system to see if you qualify for a USDA mortgage loan.

How To Calculated Your Debt-To-Income Ratio For USDA Loans

Gustan Cho Associates offers an easy-to-use mortgage calculator to help you estimate your front and back-end debt-to-income ratios.  GCA’s user-friendly mortgage calculator will give you an estimate on your mortgage payment.

Thousands of viewers use the GCA mortgage calculator. The GCA mortgage calculator is used by loan officers, realtors, and borrowers throughout the real estate industry.

For any questions on utilizing our state-of-the-art mortgage calculator, don’t hesitate to contact us at Gustan Cho Associates at 262-716-8151 today. Text us for a faster response. The USDA mortgage calculator gives you a field where you can enter other liabilities such as your credit card payments, auto loan payments, student loans, and any other debt you may have reported to your credit report.

Do Lenders Have Different USDA Home Loan Requirements

If you have less-than-perfect credit or high debt-to-income ratios, you must work with a highly skilled mortgage team who knows the ins and outs of a USDA mortgage loan. Not all lenders have the same lending requirements on USDA loans. 

USDA Home Loan Requirements on Credit Scores

Credit score – Credit scoring can be very difficult to understand. The USDA automated underwriting system generally wants to see a credit score of 640 or higher. However, purchasing a home with a USDA mortgage loan is possible even if your credit score is below 640.

If your credit score is above 640, the automated underwriting system for USDA loans will typically send you an approval.

While many factors go into a USDA mortgage loan, a credit score is highly important. Gustan Cho Associates is always available to review your credit report in detail. We are experts in credit scoring and can give you pointers to raise your credit score in order to qualify for a home loan.

USDA Loans For Bad Credit

We have seen every credit score from the mid-400s to the mid-800s. There are many little things you can do to raise your credit score. Our team is here to offer our professional advice. While we usually do not recommend credit repair, we are always willing to advise you on raising your credit scores. Borrowers with bad credit can qualify for USDA loans. Typically, if you have bad credit and lower credit scores, you will need to show other compensating factors. Example of compensating factors are on-time payment history, additional assets in the bank, longevity on your job, and high residual income..

Perks To a USDA Home Loan

In our opinion, the number one perk to a USDA loan is the no down payment requirement. In the economic condition the United States is currently in, saving money is harder than ever. With inflation higher than in decades, many Americans are burning through their savings just to make ends meet.

USDA Home Loan Requirements on Down Payment

Since a USDA loan does not require a down payment and allows the seller to pay closing costs, purchasing a home with little or even no money out of pocket is possible. A USDA mortgage loan will allow the seller to pay up to 6% of the purchase price towards seller-paid closing costs.

While we do not require a copy of the home inspection, you want to make sure the property you are purchasing will pass a USDA appraisal.

If you find a home for $300,000, and the seller can pay up to $18,000 in closing costs. It is unlikely the closing cost will be that high, so in theory, you will not need to bring any money out of pocket if you can negotiate seller-paid closing costs into your contract.

USDA Home Loan Requirements on Mortgage Insurance

Mortgage insurance – Technically, a USDA mortgage loan does not require mortgage insurance. However, they do have a guaranteed fee. Unlike an FHA loan, USDA mortgage loans come with an upfront and annual guarantee fee.

The upfront guarantee fee is something that is financed into your total loan amount and is always equal to 1% of your loan amount.

The annual guarantee fee is added to your monthly payment.  The annual fee in the year 2023 is equal to .35% of the loan amount. For example, you have a $250,000 USDA loan, so .35% of $250,000 is $875. This $875 will be divided equally into your 12 monthly mortgage payments, so $72.92 will be collected monthly to pay the annual guarantee fee.

USDA Home Appraisal

Appraisal – Similar to most mortgage programs available, USDA loans require an appraisal conducted by a third party before an underwriter may approve the loan. A USDA appraisal is slightly different from a conventional appraisal.

A USDA appraisal will also include a well and septic report to verify the systems are working correctly and meet USDA guidelines.

Since the USDA appraisal is more in-depth than a conventional appraisal, it is usually in your best interest to complete a home inspection at the beginning of your home-buying process. For more information on the USDA appraisal process or the difference between a home appraisal and a home inspection, please reach out to Gustan Cho Associates today.

USDA Versus Conventional Home Appraisal

With a conventional appraisal, the mortgage lender is looking for the home’s value and not much more. That way, a lender can make their decision on how much they can lend you. With a USDA mortgage loan, the lender is looking for the value of the home along with condition of the property. Security, safety, and habitability are the three factors USDA home appraisers look for.

Home Inspection Versus Home Appraisal

A home inspection is not required by lenders or the USDA. However, it is highly recommended homebuyers get a home inspection done. A home appraisal is required by lenders. The appraisal determines the collateral for the lender.

A USDA appraiser will confirm the condition of the home to make sure the home meets USDA standards.

A USDA appraisal will verify the home is up to code and in livable condition. Items such as the HVAC system and roof will be viewed and must meet strict criteria. USDA appraisals also look for damage like broken windows and holes in the wall. 

What Is The Mortgage Process for Getting Approved For a USDA Loan

Applying for a USDA loan with Gustan Cho Associate is easier than ever. As mentioned above, you must work with a loan officer familiar with this program, or the process will be a nightmare. Our team of highly skilled loan officers is up to date on all mortgage guidelines on USDA mortgage lending. 

The mortgage process of USDA loans differs than other loan programs because the lender underwrites the file and after the lender approves the file, the file needs to be underwritten again by the USDA.

After reviewing your upfront qualifications with a one-on-one mortgage consultation, you will be paired with a licensed loan officer in your state. Your licensed loan officer will send you an online application link. Since the beginning of the COVID-19 pandemic, many Americans have decided to move out of large cities and into more rural areas.

Mortgage Process By USDA Underwriter

A USDA loan can be a great purchasing tool to make this a reality. Every USDA loan is reviewed directly by the United States Department of Agriculture. After you receive a clear to close on our end, the file is sent directly to USDA for final approval.

During the final approval process by the USDA mortgage underwriter, there are things out of the lender’s control that may disqualify you from the mortgage loan.

Since USDA directly endorsed and guaranteed these loans, they have the final say. The USDA will rarely deny a closing, but it is a possibility. With that out of the way, we strongly encourage you to contact our team directly with any USDA-related questions. We are available seven days a week and work in the evenings to fit your schedule.

How Can I Qualify and Get Pre-Approved For a USDA Loan

This online application is easy to navigate and will gather the required information to start the process. This application link will ask you for details surrounding your current residence, employment for the previous two years, income and asset information, and other items based on your application.

Documents Required To Process USDA Loans

After completing the online application, you will be given a secure portal to upload your income and asset documentation. After your loan officer receives your full application with all the requested information and the documentation, they can move forward with the pre-approval process.

Since a USDA mortgage has a few more qualifications such as going through two different underwriting processes, the mortgage process on USDA loans may take longer.

Please remember that even though a down payment is not required, you are still on the hook for closing costs unless you can have the seller pay those for you. The number one hurdle for homeownership is saving for the down payment so that a USDA loan can skip the hardest step for you.

Getting Approved With The Best Lender For a USDA Loan

Now that you understand the basics of USDA lending and how to apply with our team, we encourage you to apply today.  We strongly encourage you to search the USDA eligibility map to ensure you are looking in a USDA-eligible area. Not every lender offers USDA mortgage loans; more importantly, not every loan officer knows the qualifications. Since a USDA home loan can be difficult to finish, it is important to work with a highly skilled mortgage team such as Gustan Cho Associates.