Step-by-Step Guide to USDA Loan Qualifications: Are You Eligible?

USDA loans, backed by the U.S. Department of Agriculture, provide an excellent opportunity for eligible homebuyers to secure financing with zero down payment in designated rural areas. This guide will delve into the specific qualifications required to obtain a USDA loan, ensuring you have a clear understanding of what it takes to qualify.

1. Property Location and Type

Location:

• Rural Designation: The property must be located in an area designated as rural by the USDA. These areas typically have a population of less than 35,000. You can check the USDA's website to determine if a specific property is eligible.

Property Type:

• Eligible Properties: Single-family detached homes, attached homes, and PUDs (Planned Unit Developments) are eligible. Condominiums and townhouses are also acceptable.

• Ineligible Properties: Manufactured homes, investment properties, second homes, attached properties, 2-4 unit homes, and unique properties such as log homes or geodesic domes are not eligible.

2. Credit Score and Credit History

Minimum Credit Score:

• Standard Requirement: A minimum credit score of 600 is required. However, scores between 580-599 may be considered on an exception basis with senior management approval.

• Manual Underwriting: Credit scores of 640 and below will require manual underwriting, as GUS (Guaranteed Underwriting System) will not approve these scores.

Credit History:

• Credit Exceptions: Extenuating circumstances, such as temporary job loss or medical emergencies, can be considered for credit exceptions. Lenders must document the circumstances and provide a rationale for the credit decision.

3. Income and Employment Verification

Income Limits:

• Moderate Income: Applicants must have a stable income that falls within the moderate-income limits set by the USDA for their area. These limits vary by location and household size.

Employment Verification:

• Verification Period: A minimum of two years of stable employment is required. If the applicant has been with their current employer for less than two years, previous employment must be verified to cover the two-year period.

• Alternative Verification: If traditional documentation is unavailable due to a disaster or other reasons, alternative methods such as tax returns or W-2s obtained from the IRS may be used.

4. Debt-to-Income (DTI) Ratio

DTI Requirements:

• Maximum DTI: Generally, the maximum DTI ratio is 43%. However, a higher DTI may be considered with strong compensating factors and senior management approval.

• Student Loans: Payments for deferred loans or income-based repayment plans must be included in the DTI calculation. The higher of either 0.5% of the loan balance or the actual payment amount must be used.

5. Asset and Reserve Requirements

Asset Verification:

• Bank Statements: Two months of recent bank statements are required to verify assets. Alternate evidence such as statement printouts stamped by the bank can also be used.

• Source of Funds: All deposits must be verified to confirm they are not from undisclosed income sources.

Reserves:

• Minimum Reserves: For applicants retaining their current residence, six months of PITI (Principal, Interest, Taxes, and Insurance) reserves are required. If reserves are insufficient, a 30% equity position in the departing residence is necessary.

6. Mortgage and Rental History

Verification:

• Payment History: Applicants with credit scores above 640 can follow GUS findings. For those with scores below 640, verification of rent through canceled checks or third-party institution verification is needed.

7. Property Appraisal and Condition

Appraisal Requirements:

• Full Appraisal: A full appraisal ordered through an approved Appraisal Management Company (AMC) is required. The appraisal must meet HUD standards.

• Well and Septic: A water test is required for properties with a well, and the appraiser must state if a septic inspection is needed.

8. Loan Terms and Conditions

Loan Products:

• Fixed Rate: USDA loans are only available with a fixed 30-year term.

Seller Contributions:

• Maximum Contribution: Seller contributions are limited to a maximum of 6% of the sales price.

9. Other Considerations

Non-Traditional Credit:

• Alternative Tradelines: Applicants without traditional credit history may use non-traditional credit sources, such as utility bills or insurance payments, to establish creditworthiness.

Occupancy:

• Primary Residence: USDA loans are for owner-occupied primary residences only. The property must be the applicant's primary residence throughout the loan term.

By understanding and meeting these qualifications, you can take advantage of the benefits offered by USDA loans and achieve your dream of homeownership in a rural area. Always consult with a knowledgeable lender to ensure all requirements are met and to receive guidance tailored to your specific situation.