The USDA Guaranteed Rural Development Loan Program is one of the best fixed rate zero down payment loans which exists for first time home buyers. The USDA loan credit requirements are more flexible than most traditional mortgage loan programs. Also, there are no loan limits but there are USDA income limits based on the county you are going to purchase the home in and your family size. Furthermore, you don't have to be a 1st homebuyer to be eligible for this program. Finally, USDA home loans offer low 30 year fixed interest rates and lower mortgage insurance than any other mortgage program.
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USDA loans requires a minimum credit score of 600 and you may qualify for the program with a limited traditional credit history. For example, you may have 1 credit card with 6 month payment history and a car loan with 12 month payment history and you still may qualify for the program if you have only one credit score of 620 from Experian, Equifax, or TransUnion. However, you do need to meet the credit payment history requirement of 3 credit accounts with 12 month history but they can include non-traditonal credit accounts such as rent, utilities (gas, electric, cable), auto and health insurance, cell phone, health club, etc. These accounts must be in your name and lenders will verify on-time payments with these creditors. If you do pay rent and it can be verified with the landlord or managment company or you can provide cancelled checks then you only need 2 accounts. Finally, you can combine traditional and non-traditional credit items to meet the minimum credit payment history requirements.
Two areas of concern which have been coming up lately are disputed and authorized user accounts. You should resolve disputed accounts prior to applying for a USDA loan to avoid headaches and possible denial of your loan in underwriting. Furthermore, you should remove yourself from authorized user accounts unless the owner of the account is your spouse, you have proof that you have made the payments on this accounts in last 12 months, or you have at least 2 other accounts on your credit report with a 12 month payment history.
There are some income restrictions for USDA loans. For example, USDA will consider the income of your spouse if you are married and it will count toward the maximum income limit even if any of these individuals are not on the loan. Also, this requirement may apply to your fiance or domestic partner if applicable and you need to contact FirstHomeBuyers early on in the process to determine how this will affect your loan. You can check income eligibility for your county and family size at USDA.gov website. Also, USDA will calculate and project your income for the year based on your current year-to-date income. For example, if you have an hourly job with overtime and your total income year to date as of March 31st is $27,000 with a huge portion of it being overtime then you income will be calculated at $27,000 divided by 3 months or $9,000 per month x 12 months which would give you a projected current yearly income of $108,000 which may be over your county income limit and disqualify you from the program. You may not make $108,000 per year because your overtime may occur in the early part of the year but USDA will still calculate the income based on your year to date pace. The reason I bring up this scenario is the fact that the USDA guidelines are a little complicated in some areas and you need to deal with USDA loan experts like us to review your finacial situation and determine if you qualify for the program.
Another big determining factor in obtaining approval on a USDA loan is stable and dependable income. You need a 2 year work history unless you recently graduated from college or served in the military. Also, you should be on your current job for at least 12 months unless you changed jobs and stayed in same line of work, you change jobs frequently but show continuous stable income, you are a recent college graduate or military member, or you have recently re-entered the work force after an absence to care for a family member, extended medical illness, or other extenuating circumstance.
The USDA Guaranteed Rural Loan Program requires zero down payment but there are closing costs which can be paid by the seller. For example, if you buy a home for $100,000 then the seller can pay up to 6% of the purchase price or $6,000 toward closing costs. Also, if the home appraises for more than the purchase price then you roll in closing costs up to appraised value of the home. Finally, you can get a gift from a family member, fiance, or domestic partner for closing costs.
Next, lenders will require 2 months of bank statements when you apply for a USDA loan and there are some major pitfalls you should avoid to make the loan process easier. DO NOT overdraft on your bank account within 60 days prior to applying for the loan because the funds in this account will be disqualified. You are allowed to have previous overdrafts greater than 60 days prior to application. Also, you should avoid making large deposits within 60 days prior to application. You have to provide proof of source of funds of any large deposits and any undocumented funds can't be used toward the loan. Exceptions include automated payroll deposits, income tax refunds, and social security income payments. One huge mistake first home buyers make is depositing cash on hand or cash gift from parents into their bank account. You can't just dump cash into your bank account without proof where it came from. For example, if you receive a gift from your parents then you need to get a check. You must provide a copy of this check, a deposit slip, and a gift letter provided by the lender which will need to be completed by the donor. Bottom line, an underwriter will not count any large cash deposits without proof of the source of funds.
The USDA has some important requirements for outstanding debt. All installment debts with 10 or less monthly payments remaining on the loan does not count against you in the debt ratio. The maximum total debt ratio allowed is about 45% of your gross monthly income which includes the mortgage payment plus auto, personal, and student loan payments as well as minimum credit card payments. Check your debt ratios here. Student loan payments have been causing a major issue in qualifying home buyers for the USDA program. The guidelines require that lenders must pick up 1% of the total outstanding balance for the payment even if the loans are in deferment unless you have a fixed payment. If you are on an income driven or graduated payment plan then we will pick up 1% of the balance NOT the lower payment. For example, you may have $100,000 in student loans and you are paying $400 per month on an income driven repayment plan then we would use 1% or $1,000 for the payment to qualify you for the loan. This higher payment may make your debt too high and you won't be able to get approved for the program. You can lower your payment by consolidating your student loans to a low fixed payment plan on the longest term possible up to 30 years if you have a balance of $60,000 or more. Using the $100,000 example from above, you can consolidate your loans and possibly get a payment around $500 to $600 per month on a 30 year term. You are allowed to switch back to a different payment plan which suits your financial needs after you close on your home. Finally, your debt ratio may still be too high and you may need to pay off some debt to qualify. You must allow 30 days for the credit bureaus to report these items as being paid off. If you think you have too much debt please contact us as soon as you can so we can develop a course of action to get you qualified for the program.
The mortgage payment which includes principal and interest, property taxes, home insurance, mortgage insurance, and association dues (if appplicable) can't exceed 29%-32% of your gross monthly income depending upon your financial qualifications. These ratios are pretty strict so you can't stretch your price range even if you think you can afford the monthly loan payment. FYI: The monthly mortgage payment for USDA loan is lower than FHA program. Check out the advantages of USDA home loans vs FHA program blog post. The best way to find out how much home you can afford is to complete the full online application and provide us with some income documentation so we can submit your loan for pre-approval. Once you are pre-approved you can search for homes up to your approved maximum price range.
The home you want to purchase must be located in a rural area or small town which is usually about 10,000 to 15,000 people or less. Also, the proximity to a large city matters. For example, the city of Sugar Creek in Missouri is not eligible for the program even though it has only about 4,000 people living there. The reason that this small town is not eligible is due to the fact that it is located near the 2 big cities of Kansas City and Independence. The best way to find out if a home is eligible for the program is to check the USDA eligibility map. You simply put in the exact address of the home with zip code that you are interested in and you will get a response that the home is "eligible" or "not eligible". The USDA eligibility map will show you what zones are eligible in your targeted area for your home search.
Once you have a contract on an eligible home then an appraiser will inspect the property and determine the value of the home. The appraiser will determine if the home is in safe, sound, and sanitary conditon. You can't have peeling paint, broken rails or windows, leaking roofs, missing doors, standing water in the basement, out of code electrical boxes, etc. If the appraiser detemines that repairs need to be completed on the home then the repairs must be completed prior to closing. Foreclosures are usually a bad idea unless they are in move-in condition because most banks will not allow repairs to be done prior to closing which is a requiement on a USDA loan. I highly recommend that you hire a home inspector and do a more thorough home inspection to check for possible structural damage and other issues. The appraiser's job is not to guarantee that the home is free of defects and a home inspection will give you peace of mind. Next, homes in rural areas may require a water test if there is a well and septic inspection if there is a septic tank. Check out full well and septic requirements. Also, the acreage of land should be typical for the area and no working farms or income producing properties may be considered for the USDA Guaranteed Rural Development program.
FirstHomeBuyers is an experienced USDA approved lender and we have helped thousands of home buyers utilize the USDA 100% financing program to purchase their first home. We are passionate about educating you about the loan process and qualfications for this great program. Once you are pre-approved for the program we can refer you to one of our Preferred Realtor Partners who can email you USDA homes for sale in your area and assist you in your home search. Once you find a home, you begin the process of securing the financing and it does take about 40-45 days to close on a USDA loan. You must be diligent about providing all the necessary documents and information to us so we can approve your loan quickly and ensure a timely closing.
If you want to take advantage of this great zero down payment program then you need to apply and get pre-approved for USDA home loan program now by filling out the pre-approval application. One small mis-step in the processing of your loan can make the difference between your loan getting approved or denied. Believe me, you don't want to provide tons of paperwork and information to get denied and lose out on your dream to own a home.
*We are not a government agency or endorsed by USDA.