Handy Homebuyer Information: Understanding USDA Home Loan Guidelines

When you’re buying a home, you need to make sure you get the best price possible. You also need to work with a mortgage loan company to find the lowest interest rates and the loan that works for you.

There are several loan programs to choose from, and the USDA loan might be your top option.

What Is a USDA Loan?

The United States Department of Agriculture (USDA) backs loans, which means they guarantee to pay it if the borrower defaults on the note. This loan program was created to help homebuyers in rural areas (generally measured by a population of less than 35,000) to gain access to mortgage financing. In addition to a rural location, these loans are tailored to buyers with low-to-mid incomes.

When Would a USDA Loan Be the Best Option?

If you’re buying a home in a rural area, fall into the low or middle income range for your county, want a fixed interest rate, have decent credit, have nothing saved to pay down, and/or want to finance your closing costs into your mortgage, this loan program may be a viable option for you. A USDA Home Loan typically offers lower interest rates than other traditional loan programs and finances borrowers with no down payment.

How Do You Get Qualified for a USDA Loan?

While some requirements are more lenient for a USDA loan, there are still set expectations the borrower must fulfill. In addition to meeting the income requirements and purchasing a home in a rural location, borrowers must have a credit score of 640 or higher, a steady income, and a debt-to-income (DTI) ratio of 41% or less. For example, this means if you make $3,000 a month, your monthly debt payments for your student loans, car loan, credit cards, and any other debt obligations cannot exceed $1,230.

What Would Disqualify You?

Purchasing a duplex would not be eligible for a USDA loan, as this type of loan only covers single-family homes. If you make too much money or are buying a home outside an eligible area, you would need to find another loan program. Opting for an Adjustable Rate Mortgage (ARM) would knock you out, too, as USDA loans only offer fixed interest rates. Recent severe credit problems would also disqualify you, as a recent bankruptcy, collections, or several serious late payments could cause your credit score to be under 640. If you are dead set against paying Private Mortgage Insurance (PMI), then this loan isn’t for you either, as PMI is a requirement.

Choosing the type of mortgage loan program — whether a USDA loan, a VA loan, and FHA loan, or another option — that works well for your specific situation can be confusing. That is why you need to work with a reputable mortgage lender. Your loan officer can talk with you about your goals, look at your financial situation, and recommend the loan that’s the wisest choice.