The U.S. Department of Agriculture (USDA) offers nonconforming loans called the Rural Development Guaranteed Housing Loans. These are more commonly known as USDA loans, which helps buyers with low to moderate incomes purchase their own homes.
These competitively priced loans make purchasing a home more affordable for individuals and families living in certain rural areas of the U.S.
Similar to VA loans backed by the U.S. Department of Veterans Affairs, a government institution backs USDA loans: in this case, the USDA.
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How USDA Loans Work
USDA loans and conventional loans are both mortgages that buyers get to help finance a home, but they have several major differences. Unlike conventional loans, nonconforming loans like USDA, FHA and VA loans are mortgages with government backing.
The USDA guarantees your mortgage to your lender. This ensures risk is low and allows lenders to offer lower-income buyers low interest rates and no down payment requirements. Lenders can choose to make a down payment, but it’s not required for a USDA loan.
Both loan types have closing costs, and lenders pay them back the same way: monthly installments with interest.
USDA loans have no available adjustable-rate mortgages, and they run on 15- and 30-year fixed-rate schedules.
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How to Qualify for a USDA Loan
If you’re a lower-income resident in a rural or suburban area and cannot purchase a home through traditional financing, you may qualify for a USDA loan. Here are some of the qualifications for USDA loan recipients.
Income
To qualify, a borrower’s adjusted gross income must not exceed 115% of their location’s median income. To find out whether your income is eligible, you can use the USDA’s income eligibility tool on its website.
You must also prove that you have steady income so that there’s no question regarding whether you’ll be able to make mortgage payments on time and without incident.
Debt-to-Income Ratio
To further ensure you’ll be able to make payments, lenders will look at your debt-to-income (DTI) ratio. This is how much money you owe compared to how much you earn, viewed as a percentage. Experts recommend a DTI ratio of approximately 43% or lower.
Calculate your DTI ratio by adding up your total monthly bills, such as rent, alimony, student loans and credit card payments. Then, divide the total by your gross monthly income. The result is your DTI ratio. To calculate your ratio quickly, you can find DTI ratio calculators on several websites.
[Related: How to Avoid Being “House Poor”]
Credit Score
Most USDA loan candidates should have a credit score of 640 or higher, with no accounts in collections currently or in the recent past. Speak with a lender if your score is close but doesn’t meet the loan requirements.
Residency
According to the applicant eligibility packet on the USDA website, “Applicants must provide evidence acceptable to the Agency of their status as United States citizens, U.S. non-citizen nationals, or qualified aliens, as defined in Sec. 3555.10.”
Location
Most USDA-approved homes are located in rural areas or areas close to suburbs. USDA-approved residences are rarely in urban or metropolitan areas. To find out whether the home you want to purchase is eligible for USDA financing, you can use the USDA’s property eligibility tool.
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How to Apply for a USDA Loan
To apply for a USDA-backed loan, you must consult with a participating lender, visit the USDA website or go to your area’s designated USDA loan office.
Contact Seattle Mortgage Planners Today!
Are you interested in learning more about USDA loans or other nonconforming home loans? Contact Seattle Mortgage Planners today. We have the experience and know-how to help you tackle loan and home-buying processes with confidence.
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