A USDA loan is a mortgage loan that is offered by the United States Department of Agriculture. Also known as the USDA Rural Development Guaranteed Housing Loan Program, these loans are intended to make buying homes in rural land more affordable. Similar to other government-sponsored mortgage programs, the USDA does not originate the loans but they guarantee them. Select lenders who are eligible to offer USDA loans originate them.
While USDA loans might seem catered towards farmers and ranchers, occupation has nothing to do with getting qualified. Rather, eligibility depends on location and income. Rural areas are always eligible, while only some suburban areas are eligible for a USDA loan. Most metropolitan areas are not eligible for a USDA loan. To qualify for a USDA loan, the borrower must be under the maximum household income limit. These limits vary based on what county the borrower is looking to buy in. The borrower must be without decent, safe, and sanitary housing, as well as, unable to secure a loan from a traditional source.
Other Requirements for USDA loans are U.S citizenship or permanent residency, monthly mortgage payments, dependable income and a credit history that is acceptable under USDA guidelines. The borrowers monthly mortgage payments cannot exceed 29% of their monthly income. If the borrower has other debt payments that they also make the total of all debt payments cannot exceed 41% of their monthly income. 41% is the typical upper limit of debt-to-income ratios, but the USDA will consider higher ratios if your credit score is above 680.
Borrowers who have a credit score of at least 640 will get streamlined processing. Borrowers that have a credit score below are still eligible to receive a USDA loan, but will have stricter underwriting standards.
People who qualify for a USDA loan have a couple different options for loans that they can use to best meet their needs. Borrowers have the opportunity to get a Direct Loan, or a Rural Repair and Rehabilitation Loan.
A direct loan is typically used to help low and very low income borrowers purchase a home. The money from a direct USDA loan can be used to acquire a home, repair or renovate their current home. Borrowers of USDA direct loans typically have very low or low incomes. Very low income is defined as below 50 percent of the area median income (AMI), while low income is defined as 50 to 80 percent AMI. Borrowers will have to prove that they can afford mortgage payments including taxes and insurance. Borrowers will also have to prove that they have acceptable credit histories under USDA guidelines, but are unable to acquire a loan from other sources.
Rural Repair and Rehabilitation loans are designed for people with very low incomes, below 50 percent AMI. Borrowers must use the funds to repair or improve their home. These improvements must make the home safer and more sanitary, or remove health and safety hazards.