Who Is Eligible for a USDA Loan?

USDA Loans are designed to help low and moderate-income families residing in rural communities become homeowners. To be eligible for a USDA Loan, you must meet certain criteria set by the USDA. Here are the eligibility requirements:

• The property must be in an eligible rural community as defined by the USDA.
• You must have an income that is less than or equal to 115% of the median income in the area where the property is located. This percentage may vary depending on location and family size.
• You must have a credit score of at least 640, and your debt-to-income ratio should not exceed 41%. However, some lenders may consider borrowers with lower credit scores and higher debt-to-income ratios depending on other compensating factors.
• You must be a US citizen or a permanent resident of the United States.
• You must have a stable income and must be able to prove that you can afford monthly mortgage payments.

What Are the Benefits of a USDA Loan?

USDA Loans are a great option for those who want to purchase or refinance homes in rural areas, especially for those who have limited down payment and credit score concerns. One of the main benefits to obtaining a USDA loan is that it requires zero down payment. This means that you can receive 100% financing for your home purchase. USDA loans also offer lower mortgage insurance premiums compared to other home loan programs such as FHA loans. You will also have the benefits of no prepayment penalties, meaning you can pay off your loan earlier without any penalties or fees. The final benefit is that USDA loans have more flexible credit guidelines, making it easier for people with less than perfect credit to qualify.

Mortgage Insurance for USDA Loans

Mortgage insurance, as with all USDA loans, is of two types.  There is an upfront premium financed in to the loan amount of 1% of the amount financed. So, for example, if the loan amount is $385,000, then the funding MI funding fee is $3850, so the loan amount would be $388,850.  The monthly mortgage insurance premium is .35% of the loan amount divided by 12.  So using the $385,000 loan amount. .35% x $385,000 = $1347.50 divided by 12 = $112.29.  Regular FHA loans have a 1.75%  ($6737) MI funding fee and monthly mortgage insurance factor of .85% (.85% X $385,000 = $3272.50 divided by 12 =$272.70 as compared to $112.29 for USDA.

The suggested ratio for USDA is 29/41.  The front-end ratio of 29% is unforgiving if your new payment has over 50% payment shock. In other words, if your new payment exceeds your old rent by 100%, it is unlikely that the US will be flexible with the front-end ratios.  On the other hand, if your “payment shock” is 50% or less than your new payment, we have seen front-end ratios go as high as 35%.

What Credit Score Do I Need for a USDA Loan?

The minimum credit score for these loans is 580, but expect ratios to remain strictly adhered to in this situation.

Ready to apply or need more info? Click Get Started now!