USDA loans are perfect for buyers in a rural area that have low income. In fact, the USDA program is only for low to moderate-income buyers. If you make too much money, you may not qualify. One of the nicest things about the loan program is that you don’t need a down payment. This helps low to moderate-income buyers that need their income to cover monthly expenses buy a home without savings.
Keep reading to learn if you might qualify for this no down payment program.
Your first step is to figure out if you are eligible for the loan program. This is different than qualifying for the loan. You have to be eligible by proving that your total household income is less than the maximum allowed for your area. The USDA allows your household income to be up to 115% of the average income for the area. Again, this includes everyone in your house, even children, as long as they are over 18 years old.
The USDA will total the gross monthly income for everyone in your household. They will then apply any allowances you may be eligible to receive. They include:
- $480 for any children under the age of 18
- $480 for any children over the age of 18 but in school full-time
- $480 for any disabled relatives living with you
- $400 for any elderly relatives living with you
Once the USDA deducts your allowances from your total household income, they will compare the total to their requirements for your area. If you make less than what they allow, you are eligible for the program.
Qualifying for the USDA Loan
Qualifying for the USDA loan is different. This is when you and a co-borrower (if you have one) prove that you can afford the loan. Any household income you included for your eligibility doesn’t count here; only the income from the borrower and co-borrower count.
IN addition to your income, you’ll have to prove that you have the credit score to qualify for the loan. Lenders take the lowest middle credit score between you and your co-borrower. That qualifying score must be 640 or greater in order to qualify for the USDA loan.
You’ll then have to abide by the USDA debt ratio guidelines. They allow up to 29% of your gross monthly income to cover your new housing payment. This also allows up to 41% of your gross monthly income to cover your total monthly debts (credit cards, car payments, student loans, and the new housing payment).
Any savings that you have to verify for the USDA loan is to cover the closing costs and the USDA charges. You don’t have to verify money for a down payment. The USDA will provide 100% of the purchase price of the home, as long as it is less than or equal to the appraised value. But the lender will need proof that you can cover the closing costs and the 1% upfront mortgage insurance that the USDA charges.
Miscellaneous Facts About the USDA Loan
It’s important to know that you can only qualify for a USDA loan if you can’t qualify for any other loan. For example, if the USDA thinks that you have the qualifications for an FHA loan, you can’t use USDA financing. If that’s the case, then you may have to come up with a 3.5% down payment for the FHA loan.
You must also prove that you will live in the home as your primary residence. The USDA loan is only for owner-occupied properties; it is not for second homes or investment properties. You must live in the home the entire time that you have the USDA loan.
If you take the USDA loan option, you will have to pay mortgage insurance on the loan for the entire term. While the USDA mortgage insurance is low (0.35% per year), you still have to pay that extra fee the entire time that you have the loan.
You don’t need a down payment for the USDA loan, but you do need to prove that you are eligible and qualify for the loan program. If you have a down payment saved, you can check out the FHA loan, which may be your only option if you have the money to put down and the debt ratios that qualify for FHA financing. If you don’t have a down payment and you want to live in a rural area, though, the USDA program can be a great choice.