Are you dreaming of living in the country surrounded by lots of space? If so, then check out the great deal you can get with a USDA loan. Homestead Financial Mortgage is an expert at USDA loans and can help get you into your very own home in an area you’d love to live in.
The Advantages of USDA Loans
The US Department of Agriculture and Rural Development encourages people to buy homes in less populated areas. They offer a home loan that doesn’t require a down payment, and your credit doesn’t have to be perfect. Sound good? Well, read on to see if this could be your ticket to homeownership.
What’s an USDA Loan?
The full name for a USDA loan is the "Rural Development Single Family Housing Guaranteed Loan Program." This loan is guaranteed by the government and only available in rural locations. Unlike other loans, you cannot get this type of loan on properties within a big city.
The purpose of the USDA Rural Development Guaranteed Housing Loan Program is to develop areas of the country that are underdeveloped and help low to middle-income borrowers purchase a home.
These loans offer some powerful incentives like 100% financing and approval for borrowers with less than perfect credit. The only other loan that doesn't require a down payment is a VA loan, but that's only available for veterans and their surviving spouses.
If you're set on living in the middle of a big city like Denver, Orlando, or Chicago, this might not be the right mortgage for you. But if the suburban life sounds appealing, you should learn more about this government loan. One thing to keep in mind is that in many cases, depending on the location–you can still find a property that’s just on the outskirts of town. That way you'll have the best of both worlds - city and country.
USDA Loan Requirements
The requirements for an FHA loan are pretty straight forward.
- Basic eligibility - you have to be eligible to participate in a federal program, you can't have been suspended or disbarred from participating in federal programs. Suspension or debarment occurs because of fraud and criminal activities.
- Down payment - zero, that's right. You don't have to put any money down.
- Location - available only in eligible rural areas. You can't search in a general area or individual county. You'll need an actual address. Once you have an address, go here to search.
- Income - because this loan is for low to moderate-income borrowers, you can't make too much money. The income limit is based on the number of people in your household and the county limit. You can search for USDA income limits here.
- Primary residence - you must agree to occupy the property as your primary residence.
- Citizenship - you'll either need to be a U.S. citizen, qualified alien (lawful permanent resident), or non-citizen national.
- USDA Loan - you can only have one USDA loan at a time.
Although the USDA doesn't set a minimum score, your creditworthiness is still important. Generally, you'll need a score of 640 or higher. If you have any tax liens or government student loans in default, you'll need to set up a payment plan and start paying them before getting a loan.
If you haven't established traditional credit, your Homestead loan originator can help you document non-traditional credit such as on-time payments for:
- Cell phones
If your credit isn't quite good enough, we can let you know what you can do to improve it.
Your ability to repay the loan goes hand in hand with your income and debts. When the underwriter looks at your file, they'll want to be confident you can afford the loan you're applying for. The underwriter will look at your debts compared to your income. That comparison is called your DTI or Debt-to-Income Ratio.
Debts include monthly obligations like court-ordered child support, vehicle loans, credit card minimum payments, and your mortgage payment (including principal, interest, taxes, and insurance).
Your income includes stable income like W2 income, self-employed income, regular child support, disability, social security, and pensions. Income will include all eligible income from any adults living in the home - not just the borrowers on the loan.
For eligibility, your debts should not exceed 41% of your income. Here's an example:
Debts - $1,800
Income - $4,500
DTI = 40%
If your debts are too high, sometimes there are a few small ones you can pay off and then be within the acceptable DTI range. Ask your loan originator, they’ll be able to help you.
The main qualification for the property is that it has to be safe, sanitary, and secure. Just like for other government loans like FHA and VA.
Other qualifications include:
- Modest - don't have dreams of buying an estate or mansion. These loans are for modest family homes.
- Must be predominantly residential - rather than industrial, agricultural, or commercial.
- Not mainly income-producing - for example, it can't be a farm or ranch that is primarily a business that happens to have a house on the property.
- Zoning - must be compliant with zoning restrictions.
- No pools - you can't buy a home with an in-ground pool.
- No Termites - the home had to be clear of termites and pests.
USDA Appraisals - you'll need an appraisal from an approved USDA appraiser. If they find things that need to be repaired for the health and safety of the occupants, these items will need to be completed and reinspected before the loan closes.
USDA Loans - Make Homeownership Possible
Now that you've learned all about this unique government loan that offers zero down, low rates, and no prepayment penalty, it's time to start shopping. Make sure you let your real estate agent know you want to look at rural properties and that you intend to get a USDA loan. The professionals at Homestead Financial Mortgage are here to help you every step of the way. Contact us today.