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USDA Home Loan Requirements – The Full Picture
USDA home loans are a great option you will want to look into if buying your first home. This is especially true if you are buying in a rural area or somewhere else outside of a big city. These loans are designed for non-urban housing, though what the United States Department of Agriculture (USDA) defines as “rural” is more broad than you might think!
What is a USDA Loan?
USDA loans are part of the USDA’s Rural Development Guaranteed Housing Loan program. They are available to home buyers who have low-to-average income in relation to the median income levels in their area. The home needs to qualify based on location, while the borrower needs to qualify based on income and other eligibility requirements. If you and the property are both eligible for a USDA loan, then you can qualify for a home loan with no down payment, reduced private mortgage insurance (PMI) and below-market mortgage rates.
USDA Home Loan Eligibility Requirements
In other words, the USDA loan is a fantastic mortgage loan program if you qualify. Below are the USDA home loan requirements as of 2021.
“Rural” Property Eligibility
The home must be in a “rural” area, which is typically defined by the USDA as a town with a population of less than 20,000. Click here to view the current eligibility maps.
Primary Residence
The home must be utilized as your primary residence. It cannot be a vacation home or investment property. You can still own those in addition to your USDA-financed home, but it must be your primary residence.
Income Eligibility
The borrower must fall within a certain income range. You cannot make more than 15% above the local median income. So, if the average household income in the area you are buying is $50,000 a year, your total household income (including spouse’s income and anyone else living in the house) cannot exceed $57,500.
Credit Rating
The standard minimum credit score (FICO score) for a USDA loan is 640, though it can vary from lender to lender.
Debt-to-Income Ratio (DTI)
In most cases, a debt-to-income ratio of 41% or less is required. This means that no more than 41% of your monthly income can go toward other debts such as car loans, student loans or credit card payments.
USDA Loan Interest Rates
When compared with other lending programs designed for first-time home buyers and borrowers with less-than-ideal finances, USDA loans offer the some of the lowest interest rates available. VA loans are perhaps the only other competition for lower mortgage rates, but those loans are only available to military veterans, active duty service men and women, and surviving spouses. The USDA is able to offer such low rates because they have a government guarantee that reduces lending risk and protects against any losses incurred if the loan eventually defaults.
FHA loans and conventional loans, by comparison, will have average interest rates that are typically 0.5-0.75% higher than USDA loans. Though average rates are lower with USDA loans, the simple fact still holds true that you will get better rates when you have better financial standing. Low debts and a higher credit score will always make a significant difference when locking in the lowest possible mortgage rate for ANY loan, including USDA loans.
Though there are some standard requirements as noted above, USDA loan terms will often vary from lender to lender. It is a good idea to shop around and explore all your mortgage options.
If you are looking to buy a home in a qualifying Georgia “rural” area, contact Moreira Team | MortgageRight today to learn more about USDA loans and to see if this type of mortgage loan is right for you.