Do you qualify for a USDA home loan? Let’s find out!
Basics of USDA Loans
This non-conventional loan program is designed to improve underdeveloped areas of this great nation, while helping low- to middle-income families purchase a home without a down payment. Not all mortgage lenders offer this non-conventional loan program, but Homestead Financial does!
The United States Department of Agriculture insures loans for homebuyers looking to purchase a primary residence in eligible rural areas of the United States. A USDA loan is designed for people living on limited incomes, so if you make too much money per year, you won’t be eligible for the loan. The income limit is based on the number of people in your household and the county’s income limit, which will vary by location.
You can verify income limits and eligible addresses on the USDA government website or through the realtor you’re working with. Know that 97 percent of areas of the U.S. are eligible for USDA loans, while only 3 percent are not! That’s a wide geographical expanse for you to consider!
In terms of interest, the USDA rates are quite low, and payment assistance can lower your interest rates even farther, if you earn a qualifying income. The standard interest rate changes with the market. Compared to other loan programs, however, USDA mortgage rates are usually the lowest, matched only by VA loans for military veterans. USDA loans are fixed-rate mortgages that last 15 or 30 years. Adjustable-rate mortgages are not available through the USDA program.
Unlike conventional loans, USDA loans allow you to finance the closing costs into the loan, so you generally need very little upfront to make your purchase. You can, of course, still contribute a small down payment, but it is optional. Family and non-family members are allowed to help you cover your closing costs, and the seller may pay closing costs for you as well.
USDA Eligibility and USDA Credit Score Minimums
In all cases, USDA eligibility is based on you, the buyer, and the property you’re looking to purchase. The home must be located in a rural area, which is generally defined as having a population of less than 20,000. You also cannot make more than 15 percent above the local median salary, which will vary depending on where you live. The home you’re considering must be your primary residence. You cannot purchase an investment property or a vacation home with a USDA loan, and only single-family residences qualify.
To receive approval for a USDA loan, you must be able to prove that you have a steady job and income, usually by using your tax returns and pay stubs. You must also have a debt-to-income ratio (DTI) of 41 percent or less. That means that no more than 41 percent of your income should go toward paying off your debts each month. It is possible to qualify for a USDA loan with a higher DTI, as long as you have a credit score higher than 550, stable employment, and have shown a demonstrated ability to save money. Ultimately, your mortgage lender makes the decision. For reference, the maximum DTI for a conventional loan is usually between 36 and 45 percent, depending on credit scores and other qualifying factors.
Generally, buyers using a USDA loan must have a FICO credit score of at least 640, but that can vary by lender. Comparatively, your credit score must be a minimum of 620 to qualify for a conventional loan. However, your interest rates with a conventional loan and a lower credit score may be significantly higher.
USDA Loan PMI
Aside from the above qualifications, buyers considering an USDA loan should understand PMI and loan limits. Private mortgage insurance (PMI) protects the lender in case you default on your loan, and it is included in your USDA home loan as a monthly fee. You may also need to pay an upfront fee. For home purchases, the PMI fee upfront is about 1 percent of the size of the loan, and an annual fee of 0.35 percent, which is added to your monthly payment.
For example, if you take out a USDA home loan for $100,000, you would need to pay an upfront mortgage insurance premium of $1,000 at closing. Then, each month when you pay your mortgage, you pay an additional $29.17 dollars to maintain your PMI. PMI is required on all home loans where you’ve provided less than 20 percent of the home cost for a down payment.
Property Requirements for USDA Loans in Missouri, Kansas, and Illinois
There is no maximum mortgage you can take out for a USDA loan, as long as you meet the debt-to-income requirements. However, the property you choose to purchase must meet certain basic requirements, as they would for any government loan program.
The home must be modest, not an estate or a mansion and be located in a predominantly residential area; it cannot be income-producing, such as a farm or ranch that happens to have a house on the property. Unfortunately, homes with an in-ground pool do not qualify for a USDA loan. The home must also be compliant with zoning restrictions and be clear of termites and other pests.
An approved USDA appraiser must examine and value the home. They’ll look for anything that needs to be repaired that would otherwise make the home unhealthy or unsafe to occupy. Sometimes, your appraiser can identify improvements that you can negotiate with the seller to perform, but even seemingly minor issues could disqualify a home from a USDA loan. Your real estate agent can give you insight about what these items may be when you tour homes before you put in an offer.
Homestead Financial Offers USDA Loans Near You
Homestead Financial is a USDA direct lender, so when you work with us to get a mortgage, we decide whether you qualify for a loan and guide you through the mortgage process. If you’re ready to buy a home, contact us to get started on the pre-approval process, so you’re ready to start working with the real estate agent of your choice.