USDA loan requirements are tailor-made for borrowers who don’t have the best credit or income.
What is a USDA loan?
It’s a loan designed for borrowers who want to purchase a rural property. This program is for applicants who struggle with low credit scores and/or low incomes.
With USDA backing, lenders are usually more willing to approve applicants. Also, the USDA offers different types of loans besides guaranteed loans.
This article will highlight the USDA loan program in greater detail. Let’s explore.
USDA Loan Types
There are three versions of USDA loans: guaranteed, direct, and home improvement. Read further to see which one applies to you:
Direct USDA Loan
Instead of a bank lender, the USDA will loan money to you directly. It’s the best option if you have trouble obtaining a mortgage through traditional lending networks. The USDA will consider this option if you hover in the low-income range.
The interest rates are usually favorable as well. For example, you could get an interest rate as low as 1%.
Guaranteed USDA Loan
This loan is similar to VA and SBA loans in terms of financial backing. The USDA will guarantee a certain portion of the loan. As a result, lenders are more likely to approve your application.
This is a great option if you don’t have the greatest credit score. For most lenders, you must have a minimum score of 640. Also, you may qualify if you’re a low or middle-income borrower.
To qualify, you cannot have an income that’s more than 115% of the median family income within your designated area. This includes the combined income of everyone in the household.
The guaranteed option comes with a no-money downpayment. That said, you must pay mortgage insurance.
Guaranteed Loan Qualification
The guaranteed loan option is the most common USDA loan package. Besides a 640 minimum score and a low-to-middle income, you must meet the following requirements:
- The house must be a primary residence
- You haven’t been barred from obtaining a federal loan
- You must be a U.S. citizen or legal alien
- The house in question must qualify
When it comes to housing qualifications, the USDA prefers houses that are in good condition. To verify the condition, the USDA will send an appraiser to inspect the home.
Above all, the home must be in a designated rural area. Rural areas cover most parts of the country, including some suburban areas. In fact, some suburbs of metropolitan areas may qualify for USDA financing.
For example, the USDA’s definition of a rural area entails the following:
- The population doesn’t surpass 10,000 residents.
- The area isn’t a metropolitan area and has less than 20,000 residents.
Some areas may have lost rural status due to census classifications. However, the USDA will still consider these areas if they have less than 35,000 residents and have maintained a rural character.
Further, the federal agency will consider loans in areas where low and middle-income borrowers have a harder time getting mortgages.
To see if your area is eligible, you can use a USDA loan map online.
USDA Subsidized Loans for Land
The USDA doesn’t provide loans for land purchases. The land in question must be in connection to an existing home or a new home. The USDA doesn’t have acreage limits, but the acreage must be within the typical range of the designated area.
The Application Process
The best way to apply is through a lender within the USDA loan network. You can contact the USDA to find a list of approved lenders. Choose a lender that specializes in rural home loans.
Overall, you’ll work with a specialist to see if you qualify. The rep will also determine how much you can afford. In addition to narrowing down the homes, the rep will convey any hurdles that could prevent your approval.
Some lenders may provide prequalification and preapprovals online. The preapproval process is more important than the prequalification process because it’s more specific. Whereas prequalification is more of an estimate, preapproval determines approval based on your financial profile.
Be prepared to submit the following documents during the preapproval process:
- Tax returns
- Pay stubs
- Bank statements
- Photo ID
Lenders will also use these documents to verify your debt-to-income ratio. The DTI standards depend on the lender.
Additionally, lenders look at two types of DTIs: front-end ratios and back-end ratios. A front-end ratio refers to new housing expenses relative to your gross monthly income.
Back-end DTI refers to all of your primary monthly expenses relative to the gross monthly income. Lenders generally prefer a front-end DTI of 31% and 41% for back-end DTIs.
The Next Steps
After approval, you can begin finding a home of your choosing. Find a real estate agent, and show them your preapproval letter. This letter can give you an upper hand if the seller has multiple offers.
You’ll work with the lender and the agent to get the home of your choice. After signing the purchase agreement, the process will go to underwriting.
The underwriter will review all documents and information to ensure everything is accurate. Then, the next step is the closing process.
The Best Thing About USDA Loan Requirements
USDA loan requirements are somewhat flexible. The USDA has a flexible definition of a rural area.
Moreover, you stand a high chance of qualification if you have a minimum 640 score. Plus, it’s more accessible because borrowers can choose from different types of USDA loans.
Are you wondering what to do if your coveted property has multiple offers? Click here to learn more.