The US Department of Agriculture (USDA) offers a mortgage program that provides home buyers with the ability to purchase a home with no money down at a fixed interest rate. This loan is available for both first time home buyers and subsequent home buyers! Although there are USDA income limits and property eligibility requirements to consider, most buyers find that USDA loans are often quite accessible.
If you are wondering if this could be a good option, you’re not alone! Potential buyers often ask us the following questions:
- Who is eligible?
- What are the area requirements and income limits?
- What can I expect when it comes to a down payment and interest rates?
- Will a not-so-great credit score keep me from being able to own a home?
- Where do I begin the process?
In this article, we’ll tackle these common questions and give you the information you need to make home ownership more attainable.
Who is eligible for a USDA loan?
USDA loans are known for the flexibility they offer potential buyers. To qualify to make use of this loan option, borrowers must meet a few basic eligibility requirements.
These include (but are not limited to):
- US Citizenship or permanent residency
- Ability to prove creditworthiness (more on this topic later)
- A stable and verifiable income
- Property is in a designated area and will be used as a primary residence
- Household income meets requirements set forth by USDA
Income Limits and Area Requirements to Keep In Mind
USDA Rural Development Guaranteed home loans provide first time home buyers and subsequent home buyers with the ability to purchase a home with no money down and a fixed rate. Although there are USDA income limits and property eligibility requirements, buyers find that most are eligible. Below are the standard limits, but there are exceptions to exceed these levels and some county limits are higher.
USDA household income limits for most counties:
- 1-4 household members $82,700
- 5+ household members $109,150
Additionally, eligible properties include stick-built homes, townhomes, off-frame modular homes, and approved condos in USDA-eligible areas. Most of America, other than highly populated areas, is eligible.
Plus, USDA is not just for low priced homes in the country. Actually, buying a home up to 453,100 is possible based on 2018 loan limits. Plus, many mid-sized towns are eligible. Even many whole counties are USDA eligible. If a city is not eligible, then spread out the home search to consider USDA eligible properties.
If you find that you still have questions about eligibility, please reach out to one of our experienced, licensed loan officers.
USDA Down Payments and Interest Rates
First time home buyers are not required to have 20% down payment with USDA loans; in fact, this program provides the ability to buy a home with no down payment at all. Other benefits include flexible underwriting guidelines and affordable monthly payments.
Other ways that USDA home loans offer more affordable financing to buyers includes:
- 30 year fixed rate – which is the only option
- Low 1%, financed USDA funding fee – the lowest among government loans
- Reduced mortgage insurance
Loan Credit Requirements – Minimum Credit Score
It will be important to know the difference between free credit scores vs mortgage credit scores. Checking credit report sites such as Credit Karma may give you a rough estimate as to what your score may be, but it will not likely be entirely accurate. You will want your mortgage lender pull your credit to truly determine what you will qualify for.
As we mentioned earlier, the USDA loan is very forgiving when it comes to credit scores. This program allows as low as a 620 mortgage credit score. That’s pretty aggressive for a no-money-down purchase!
Typically, a 620 credit score means using the middle of 3 credit scores pulled by the lender. Although it is possible through the USDA loan credit requirements to have only 2 scores, and loan approval may even be possible with only one score.
Buying a Home with One Credit Score
That’s right, a no-money-down purchase with one credit score is possible! Keep in mind that USDA loan credit requirements are not based solely on credit scores. Additionally, whether there are one, two, or three credit scores, there must be sufficient established credit. This is very important, especially for buyers with only one credit score.
Along with credit scores, lenders will need to determine creditworthiness, which is defined as the extent to which a person or company is considered suitable to receive financial credit. To determine creditworthiness, your lender will review items such as:
- Repayment patterns
- Credit utilization
- Length of credit history
Applicants without established credit may still be eligible, but will require credit verification from alternate sources, such as rent payments, utility payments and insurance payments.
USDA Loan Credit Requirements Allow Alternative Credit
Traditionally, rent and insurance do not report to the credit bureaus. In cases of limited references reporting on a buyer’s credit report, it may be possible to use alternative credit to prove creditworthiness as they may prove ability to pay bills on-time.
Reasons to Use Alternative Credit References:
- Limited number of accounts reporting on credit a minimum of 12 months
- Manual underwriting approval (used when an automated approval is not received)
- Authorized user accounts make up a majority of credit
- Prove there is more to the picture than limited credit
Examples of Alternative Credit to Use:
- Rent history (although some report to credit bureaus)
- Insurance (life, health, auto, boat, disability) – not payroll deducted
- Cell phone
- Xbox live, Apple
- Small store accounts – furniture, gas station, heating oil companies
- Buy-here, pay-here car loans
- Consistent savings pattern – depositing a set amount over a 12 month period
In cases where credit is limited, but everything else looks in line, proving extra alternative credit references can put a borrower over the top when it comes to USDA loan approval.
Loan Credit Requirements – Short Sale, Foreclosure, Bankruptcy
The USDA Loan program also allows for opportunities to buy a home with no money down after a foreclosure, short sale, or bankruptcy. Generally, USDA loans require for 3 years to elapse following these events, plus a re-established, on-time credit history.
In extenuating circumstances, it is possible to qualify for a USDA loan with less than 3 years after an event.
USDA specifically mentions that divorce, job transfer, or relocation is not extenuating. Although, in the case of divorce, if the prior loan was current at the time of divorce and then the ex-spouse had a short sale or foreclosure, an exception may be granted.
How Do I Check My USDA Eligibility?
Buyers can be far from “perfect” in order to meet USDA eligibility. With flexible guidelines, leniency when it comes to credit scores, and its overall affordability, the USDA loan provides one of the easiest ways for a home buyer to purchase a home.
You can check your eligibility here!
The USDA loan is just one of many great options available to potential buyers. A conversation with one of our licensed, experienced Loan Officers will help you determine which program will best serve your needs.
Whether you prefer a phone call, text message or email communication, we are more than happy to accomodate.