At NEXA Mortgage, it’s our top priority to serve clients with the resources they need to ensure they’re able to get the home that they want. Fueled by years of industry knowledge combined with sophisticated expertise, we pride ourselves on acting as a leading resource for clients looking to explore which loan option best suits their needs.
USDA Home Loan
Designed to finance homes in rural areas, a USDA Home Loan is one of the bigger programs among all of the different categories. Similar to VA and FHA, it is backed by the government and has the potential to offer great terms that benefit home buyers. It’s the only home loan program that offers a 0% down payment available to people who are not veterans.
Property and Location Requirements
A USDA home loan is applicable to homes in rural areas. USDA offers a tool on their site which provides a map that potential home buyers can navigate to filter out the areas that have USDA-eligible homes.
Keep in mind that while these programs are for properties in rural areas, they do not allow for financing on homes that are attached to any income generating land or building. This means that if you have an active farm or silo that is used for commercial purposes, the property will be deemed ineligible for a USDA home loan.
They do have farm loan programs that are independent from the home loans, which we can explore if its more appropriate for what you’re looking for.
Who Best Qualifies for a USDA Home Loan?
A USDA loan can be a great option for any home buyer, whether it’s your first time purchasing or if you have multiple properties. USDA loans must be used to finance your primary residence. Any secondary properties, or investments will not qualify as you need to have intentions of residing full time in the home.
Credit Score
f you’re looking to apply for a USDA home loan, then you want to aim for your credit score to be around 640. This will help you to get the best rates and terms that agree with your budget and finances.
On the low end, the score sits around 580 and in rare cases can go down to 550. If you do have a score that’s in the lower range, it doesn’t completely disqualify you; however, you are going to want to make sure you have other factors that can compensate such as a high income, assets or low debt to income ratio.
As always, we’re here to further discuss and see what options might be best for you!
Debt-to-Income Ratio (DTI)
When evaluating your application, another factor that will be considered is your total monthly income and the total cost of your monthly obligations. This will help to determine if the funds in your account, after all bills have been paid, leave enough room for you to comfortably make your mortgage payments.
USDA has some of the most restrictive guidelines for debt-to-income ratio. They’re going to look for 29% as best-case scenario but will allow up to 41%. In rare cases, they may go up to 46%, but if you decide that USDA is the route you’re looking to go, then its best you aim for 41%.
Income Limits
USDA is different from other programs as they actually have income limits. These thresholds vary depending on which county you’re looking to buy in. We can help you to navigate USDA tools that help you determine what areas you qualify to purchase a home in based on your income.
An important thing to note is that the income requirements are for the entire household, and not just the people on the loan. This means that anyone residing in the home who is 18 years or older, will have their income factored into the total household income to see if you’re eligible. Income from social security, pension and retirement also contributes towards this overall number.
What other factors are considered when applying for a USDA Home Loan?
Reserves
USDA will sometimes require what are known as ‘reserves.’ This is the money in your account left over after you close on your loan. This is simply to instill confidence in the lender that once you’ve closed on your loan, you still have money to pay you first few months of your loan. Typically, they’ll need to see at least 1-2 months of reserves.
Employment
When determining your eligibility for a USDA home loan, they want to see stable employment. Ideally, you’re going to want at least 2 years of consistent employment over the past two years. It’s important to note that school does fall under ‘employment.’
If you have any gaps in your job history that exceed 30 days, then we can discuss ways to explain that in writing to the underwriter. While it’s perfectly ok if you have taken time off for whatever reason; however, we do need to demonstrate your ability to consistently hold a job so that the underwriter is comfortable extending a loan that they’re confident you’ll be capable of paying back.
Income
You also want to demonstrate stable income that’s either consistent or increasing. Decreasing or fluctuating income may require further review to ensure you’re cable of repaying the loan.
Bankruptcy, Foreclosure, Short Sell
If you’ve filed for bankruptcy or foreclosure, then you’re required to wait three years before you can qualify for a USDA home loan.
Costs Associated with a USDA Home Loan
How much money do I have to put down?
A USDA home loan is one of the only programs, aside from a VA home loan, that offers home buyers the option to put down a 0% down payment.
Do I have to pay for mortgage insurance?
Similar to FHA and conventional home loans, USDA programs also require a home buyer to pay for mortgage insurance. This is a way for the lender to protect themselves against any financial losses should a buyer default on their payments or foreclose on their home.
The good news is that this is fairly low compared to other programs, requiring .35% of the loan balance.
Is there a funding fee?
USDA does charge a funding fee of 1% which is one of the better options compared to other government backed programs.
Appraisal Requirements
Like other government insured loans that emphasize safety and health, USDA wants the property to be in good condition. They aren’t favorable to rehab homes so if that’s what you’re looking for then we may want to explore other programs that are more appropriate for your needs.
Appraisal Requirements
Like other government insured loans that emphasize safety and health, USDA wants the property to be in good condition. They aren’t favorable to rehab homes so if that’s what you’re looking for then we may want to explore other programs that are more appropriate for your needs.
Is a USDA Home Loan for You?
For qualifying home buyers, a USDA Home Loan is a great option that veteran buyers or first-time homeowners can benefit from. Whether you’re interested in applying for one, or simply want to learn more, we’re here to provide you with the information, so that you can get the home you want.
Contact us to talk with one of our dedicated agents who’s ready to help you take the first step to making your dream a reality