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What is a USDA Home Loan?
A USDA Home Loan is a great option for home buyers who meet the eligibility requirements. These special mortgages backed by the United States Department of Agriculture can provide up to 100% financing and other beneficial loan terms. However, both you and the property need to meet specific eligibility requirements for a USDA loan. In this article, we will share all the details you need to know.
USDA Home Loan Requirements
First, the property itself must meet certain eligibility requirements as laid out by the USDA. In general, USDA home loans are reserved for homes in “rural” areas. These are the standard property qualifications:
USDA-Eligible Geographic Areas —The home must be located in an area that is deemed USDA-eligible. The USDA website offers interactive maps that will allow you to search a specific address or general region to determine eligibility.
“Rural” Location — The USDA’s definition of a “rural” location is actually much broader than you might think. It doesn’t have to be farmland or remote property in the middle of nowhere. A wide number of areas actually qualify. The general rule of thumb is a city or town must have a population of less than 20,000 to be considered rural by the USDA. However, some bigger cities are eligible if they are viewed as “rural in character, or if they don’t offer great access to mortgage credit compared to bigger cities. It has actually been more than 15 years since the USDA last updated their property eligibility maps, so areas that have grown in the past decade-and-a-half might still be considered rural (for now).
Property Standards — As with almost any mortgage loan, your lender will need to perform an appraisal of the property. This is done to ensure that it is worth what you are paying, and thus determines how much risk the loan presents the lender. The appraisal will tell the lender if the home is livable and safe, while also meeting the minimum property requirements as defined by the USDA.
Primary Residence — A home purchased with a USDA loan must be used as a primary residence for the buyer. Rental properties, investment properties and vacation homes will not qualify for a USDA loan program.
Property Types — Though designated for “rural” properties, USDA loans really aren’t designed for large acreages and farms. This is a common misnomer when people hear the loans are backed by the U.S. Department of Agriculture. USDA loans are actually geared toward average single-family homes, and can sometimes even be used for town homes and condominiums.
Click here for the current USDA property eligibility map.
USDA Borrower Eligibility – How to Qualify for a USDA Home Loan
Assuming your property qualifies for a USDA home loan, now we must look at the buyer requirements. What are the eligibility standards for a borrower applying for a USDA Loan?
First-Time Home Buyer — You do not have to be a first-time home buyer to qualify for a USDA loan. However, this is the most common scenario. As a USDA loan borrower, you cannot own an adequate, livable property anywhere near the area where you are buying and this home must be used as your primary residence.
Income Limits — You must have an income of 115% or less of your region’s median income. Your entire household income will count toward this income limit, including any spouses, children or relatives living in the house with you. However, increased limits are available to families of five or more.
USDA Loan Limits — There is no standard loan amount limit for a USDA loan. How it works is the loan limit is determined by the borrower and the income limits of their area. In other words, the loan limit amount is largely affected by the income limits as noted above.
Asset Limits — If you have enough to put 20% down toward your home, you will not qualify for a USDA home loan. This program is designed for people who typically wouldn’t be approved for a conventional mortgage loan.
Debt-to-Income Ratio (DTI) — The current USDA DTI limits are 29/41. This means that 29% of your pre-tax income can be applied toward the principal, interest, insurance, property taxes and HOA dues (if applicable) on the home you are buying. Up to 41% can be used for your house payments plus all other debts. For every $1,000 in income, $290 of it can go toward the house and $120 more can go toward other debts.
Employment — You should be able to display a 24-month history of dependable employment, along with adequate income statements, to qualify for a USDA loan.
Citizenship — USDA loan borrowers must have a U.S. citizenship and/or have permanent resident status. Non-citizen nationals and qualified aliens may also qualify with valid evidence of residency status.
USDA Direct Loan vs Guaranteed Loan
One last factor to understand is whether the USDA loan will be direct or guaranteed. Guaranteed loans are provided by private lenders and then backed by the USDA. Requirements for guaranteed loans may vary from lender to lender, as they have their own qualification standards along with the USDA’s. Direct loans, however, generally will have the most stringent qualification standards. The USDA is issuing these loans directly to the borrowers, and often require very low income limits and other strict requirements.
If you are interested in learning more about USDA home loans and want to know if you and your property will qualify, contact the Moreira Team | MortgageRight today.