Last year, over 55,000 eligible borrowers purchased homes using the low-cost USDA loan program. USDA home loans carry some pretty big advantages including low rates, reduced mortgage insurance, and no downpayment requirement.
To be eligible for a USDA home loan, borrowers need to meet specific income and credit requirements, and the property must be in a USDA-designated area.
Are you considering a USDA loan for your home purchase? Here’s how to tell if you’re eligible.
Eligibility for the USDA loan program holds you to particular income and credit requirements, as well as requirements for the home you buy.
Let’s dive deeper into the income and property requirements that will qualify you for getting a USDA home loan.
To be eligible for a USDA loan, you’ll need a stable source of income. Your lender will verify this income using your income documents (paystubs, W-2’s, bank statements) along with verification from your employer.
Your income will also need to fall within the below guidelines.
USDA loans provide an affordable financing option for low-to-moderate-income homebuyers. Because of this, your household’s total income can’t exceed local USDA income limits. Income limits are calculated using 115% of the area’s median household income — so your income can’t be any more than 15% higher than the surrounding area’s median income.
The current standard USDA loan income limit for 1-4 member households is $110,650. For 5-8 member households, the limit is $146,050. USDA loan limits may be higher to account for areas where housing and earnings are a bit pricier.
The USDA does not have an established benchmark on minimum credit scores for borrower eligibility. Minimum credit requirements are set by the lender and can vary. The typical cutoff for most USDA lenders is 620. However, many lenders can and will work with you to establish your creditworthiness differently using compensating factors.
If your credit falls below 620 or you’ve not established credit history, you may find you can still get a USDA home loan by talking with a knowledgeable USDA lender.
Some lenders will instead use compensating factors to show your creditworthiness in underwriting. Documenting a healthy savings account and carrying very little debt can go a long way. If your current monthly housing expense will be lower than your new house payment, that works, too.
Additionally, your lender may ask you to establish what’s called a non-traditional tradeline. This is done showing 12 months of on-time payments on utility bills, rent, health insurance premiums, or other regular expenses. Showing your willingness and ability to maintain these monthly obligations strengthens your loan application for underwriting.
Only properties within USDA-designated rural areas can be purchased with a USDA home loan. The definition of “rural” doesn’t just mean farmland and homes in very remote areas. There are actually many suburban properties that are eligible for USDA loans as well.
The condition of the home you’re buying matters, too. The USDA outlines specific minimum property requirements (MPR’s) to ensure the house you buy is a safe and sound investment. Additionally, these MPR’s help the USDA thoroughly vet the property for the loan guarantee.
USDA home loans — and other government-backed mortgage programs — require that properties meet certain basic standards before they can be financed.
The home must have:
Only single-family homes can be purchased with USDA financing. Additionally, the property must serve as your primary residence. Investment properties and second homes are ineligible.
Homes must be located in an eligible rural area to qualify for a USDA loan. According to the Housing Assistance Council, 97% of U.S. land qualifies as “rural” in the USDA’s eyes, accounting for about 109 million people.
To see if a property you’re considering is USDA eligible, look it up on our property USDA eligibility map.
Have more questions about USDA loans or eligibility? Get in touch today.
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