The United States Department of Agriculture oversees a home loan program designed to finance properties located in rural and semi-rural areas. These areas are so designated by the United States Census Bureau and identified after the general census is taken every 10 years. This program was originally introduced in 1935 with the introduction of the Resettlement Administration, eventually being placed under the Rural Development Department. The USDA loan does not require a down payment and is one of two government-guaranteed programs that does not require a down payment.
Without the benefit of the USDA program, financing homes in sparsely populated areas would be challenging as well as expensive. When lenders evaluate a loan application they must also review at least three other similar properties in the area that have sold within the previous 12 months and within a one-mile radius. In rural areas, this requirement is difficult if not impossible to meet. The USDA program addresses this issue and provides competitive financing options for those who choose to live in a rural area.
There are no loan limits for USDA loans but there are limits on the amount of household income. To qualify for a USDA loan the aggregate household income of all borrowers over the age of 18 who occupy the home cannot exceed 115% of the median household income for the area. Even if an individual who is not on a loan application, the income must still be counted.
Qualifying income is verified with copies of the most recent paycheck stub(s) covering a 30 day period. The last two years of W2 forms are also required. For self-employed borrowers, the last two years of federal income tax returns are needed along with a year-to-date profit and loss statement. It is up to the lender to determine whether or not the P&L may be completed by the borrower directly or by the applicant’s CPA.
Lenders will review current monthly credit obligations along with the new USDA mortgage payment which includes an amount for principal and interest, taxes, insurance and mortgage insurance. Qualifying credit payments include items such an automobile loan or credit cards. Once these minimum payments are tallied the total amount is compared with qualifying monthly income to arrive at a percentage or “debt ratio.” There are two such ratios, a housing ratio and a total debt ratio.
USDA loans ask the housing ratio be at or below 29 percent of qualifying income and no more than 41 percent when comparing total monthly debt with income. Note, these ratios are guidelines and not hard and fast rules. Lenders can independently make the determination to approve a loan with slightly higher ratios given other positive factors in the file.
USDA loans do require a minimum credit score in order to qualify. The lender will order a credit score from each of the three main credit repositories. Of the three reported scores, the lender will use the middle score for qualifying. The USDA program asks for a qualifying score to be at 640. If there are two borrowers on the same loan application, the lender will use the lower of the two middle scores. The lender also has leeway when reviewing credit scores and can approve a USDA loan with slightly lower scores given other positive factors in the loan file.
USDA loans can also be approved using “alternative” credit. Alternative credit is verifying other payments the applicants make on a monthly basis to validate a responsible payment history. Such alternate credit includes utility bills and mobile phone service.
The property can be a single family home up to a four-unit property. When financing a 2-4 unit property, the borrowers must occupy one of the units. USDA loans can only be used to finance a primary residence and cannot be used to finance a rental property.
USDA loans will require an independent appraisal by a licensed appraiser. The appraiser will visit the subject property for a visual inspection and record the lot, location of the property on the lot and any easements that appear on the property. The appraisal must also contain at least three other properties that have sold in the area over the last 12 months. If the appraiser cannot located three such properties the appraiser is allowed to expand the allowable area to locate additional comparable sales. The appraiser may also note in the appraisal report the lack of three such sales but provide support of the value reached.
USDA loans are available as a 30 year fixed rate loan. Adjustable rate mortgages and hybrids are not available with the USDA program. USDA loans are also guaranteed to the lender should the loan go into default. This guarantee is financed by two separate mortgage insurance polices, an upfront policy rolled into the loan amount and an annual policy paid in monthly installments.