USDA home loans are one of two zero down mortgage programs still available in America to buy a new home. As with any mortgage, there are groups of specific requirements that must be met before an applicant is approved.
What are USDA loan requirements?
USDA Loan eligibility requirements can be grouped into three primary categories:
- Your credit history is important, but USDA’s credit standards are flexible. A FICO score of 620 or above is required through most USDA-approved lenders.
- Your income and your monthly expenses is evaluated. Standard debt-to-income ratios are 29%/41% for USDA Loans. These ratios may be exceeded with compensating factors.
- The subject home must be in a approved rural area and meet USDA property requirements.
1. Credit Requirements
When applying for a USDA home loan, the lender will pull the borrowers credit report from all three credit bureaus. This is called a tri-merge credit report. The lender then looks at credit scores and the credit history to determine if the applicant is eligible, credit-wise.
Eligible borrowers must to have a middle credit score of 620 or above with no late housing payments for at least one year. If the applicant had a bankruptcy or foreclosure in their past, they must show that an acceptable amount of time has passed since then.
USDA loan credit requirements use the following conditions for approval:
- Middle FICO credit score of 620 or above.
- No late payments in the last year.
- No outstanding judgments in the last year.
- All bankruptcy payments made on time during the last year (Chapter 13).
- At least three years passed since a foreclosure or bankruptcy (Chapter 7).
2. Income Requirements – The USDA Loan ‘Sweet Spot’
USDA mortgages are unique in that they have minimum income requirements as well as maximum income limits that borrowers must meet. Simply put, there is a ‘sweet spot’ in between the lower and upper limits applicant’s must fall between. To see if a borrower falls within the ‘sweet spot’, USDA employs debt-to-income ratios (DTI) to check the minimum limits and set maximum household limits for various areas around the country. All income must be documented properly though pay stubs, W-2’s and tax returns, otherwise it doesn’t count.
Debt-to-Income Ratios (Minimum Income)
DTI ratios are commonly used to prove applicants have the ability to repay a proposed mortgage as agreed.
The first DTI ratio USDA loan requirements employ is the “Top Ratio”, or “Front Ratio”. This ratio measures the borrower’s total income against the new housing payment including principal, interest, taxes and insurance (PITI). To qualify, the proposed new payment PITI cannot exceed 29% of the borrowers income.
The second DTI ratio, known as the “Bottom Ratio”, “Back Ratio” or “Total Debt”, weighs the borrowers total debt load, including the new housing payment against the borrowers total income. To qualify, the total of the borrowers new proposed monthly debt load, including housing payments, credit cards, car notes and student loans can not exceed 41% of their total documented income.
Maximum Household Income
Since USDA loan guidelines have maximum limits set for income, borrowers must also show that they don’t make too much money to qualify. The most popular USDA loan program, Section 502 ‘Guaranteed Loans’, contains maximum income limits equal to 115% median household income for a particular area. USDA ‘Direct Loans’ for low income borrowers have lower maximum income limits than their guaranteed counterparts. Maximum income limits vary from county to county so USDA provides a useful calculator to help figure it out: USDA Income Calculator. Calculating USDA loan income eligibility can be tricky so it’s always smart to seek an experienced USDA lender to assist you.
In review, the following income and employment guidelines must be followed for approval:
- The applicant must have a dependable two-year employment history.
- The applicant must meet USDA debt-to-income requirements of 29/41 using documented income.
- 29% Top Ratio – The new proposed housing payment with PITI may not exceed 31 percent of the applicants combined monthly income.
- 41% Bottom Ratio – The applicants proposed new monthly total debt load, including new housing payment, may not exceed 41 percent of their combined monthly income.
- The applicant’s adjustable income must be less than maximum allowed income by USDA RD for their area.
3. Property Requirements
For a property to be eligible for a USDA Rural Development Loan, it must be located in an approved rural area, as defined by the USDA. The application of “Rural Area” can be quite loose and there are thousands of towns and suburbs of cities across America that are eligible for USDA financing. USDA also requires the property be Owner Occupied (OO), and it may be possible to purchase condos, planned unit developments, manufactured homes, and single family residences.
In general, areas approved for USDA loans are located outside the limits of cities and towns with a population of 10,000 people or more. Properties located in towns with a population of less than 10,000 may also be considered eligible. To be certain if a property is eligible for a USDA home loan, applicants can check the address of the subject property on the USDA Property Eligibility Website.
The subject property must pass an appraisal inspection by an approved appraiser to obtain USDA financing. The appraisal requirements for USDA loans are very similar to those for FHA loans. The requirements are so similar, in fact that an approved FHA appraiser will perform the USDA property appraisal. The appraiser will make an value assessment of the property, which must meet or exceed this proposed loan amount. He or she will also look for other things about the home that could create problems such as structural issues, a leaky roof, missing paint and plumbing problems. Homes with in-ground swimming pools are not eligible for USDA home loans.
USDA Loan Costs and Fees
USDA loan fees are extremely competitive when compared to other low down payment mortgage programs. There are two fees involved with having a USDA loan, both of which can be paid over time.
The first fee is known as the Up Front Guarantee, which is figured by calculating 2% of the proposed loan amount and then adding that figure to the loan balance to be paid over time. For example, if your proposed loan amount is $100,000, the Upfront Guarantee Fee would be $2,000, which is rolled into the principal balance for a total mortgage amount of $102,000.
The second fee is the Annual Fee, which acts in the same way as monthly mortgage insurance. The annual fee is tallied each year by calculating 0.40% of the remaining principal balance. That amount is then divided by 12 and added to each monthly payment.
In recap, the fees charged by USDA Rural Development can be outlined as follows:
Up Front Guarantee Fee
- Upfront Guarantee Fee equals 2% of the loan amount for purchase and refinance
- Up Front Fee can be rolled into loan amount
- Annual Fee equals 0.40% of the remaining mortgage balance, which is divided by 12 and added to monthly payments.
Other Potential Fees
- Lender Origination Fees and Discount Points
- Appraisal Fees, Inspection Fees, Survey Fees and Pest Inspection Fees
- Closing Costs such as State and Local Taxes, Recording Fees, Title Fees and Escrows
One of the biggest advantages of USDA loans is the ability for the seller to pay all of the closing costs for the buyer (seller concessions), if properly negotiated in their purchase agreement.
What are USDA loan down payment requirements?
USDA Mortgages have no down payment requirement. Most other loan programs don’t allow this unless you are a military veteran.
How much can I can borrow?
To be eligible for USDA mortgage guidelines, it’s important to ask yourself “how much mortgage can I afford“. For starters, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (29% ratio). You must also have enough income to pay your new housing costs plus all additional monthly debt (41% ratio). Considering these requirements, maximum USDA loan limits are determined by:
Maximum loan amount: The is no set maximum loan limit for a USDA Loan. Instead, your debt-to-income ratios will dictate how much home you can afford (29/41 ratios). Additionally, your total household income must be within USDA loan guidelines and the maximum income limits for your area, which is usually 115% of area median income. Maximum USDA Loan income limits for your area can be found at here.
Maximum financing: The maximum USDA Mortgage amount will be 102% of the appraised value of the home.
What kinds of loans does USDA offer?
Fixed rate loans – All USDA loans are fixed-rate mortgages. In a fixed rate mortgage, your interest rate stays the same during the whole loan period, normally 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your monthly payment will be, and you can plan for it.
Can I get a USDA loan after bankruptcy?
Criteria for USDA loan approvals state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, you are also eligible to make a USDA Loan application.