This low-income loan helps borrowers buy a home with no down payment and flexible underwriting guidelines.
How the USDA Loan Works
The USDA loan is a government-backed loan program that helps low-income borrowers buy a home. The USDA doesn’t underwrite or fund the loan, but they do guarantee it.
Only USDA-approved lenders may offer the loan program, and they must abide by the USDA guidelines.
You'll apply for the loan through a regular mortgage lender or bank, provide them with any required documents, and they will underwrite the loan.
If the bank approves you for the loan, they send the complete file to the USDA for final approval. Once approved, the bank funds your loan, and you make your payments to the bank.
In exchange for the USDA’s guaranty, you must pay mortgage insurance to the USDA for the life of the loan. Today, the insurance rates are 1% of the loan amount upfront and 0.35% of the outstanding loan balance annually (paid monthly).
Who is Eligible for the USDA Loan Program?
This low-income home loan is only for specific borrowers, though. To be eligible, you must meet the following:
- Your total household income must not exceed 115% of the average for your area
- You must buy a home in a ‘rural’ area as designated by the USDA
- You must occupy the property as your primary residence
- The home must be modest for the area
How do you Qualify?
If you are eligible for a USDA loan, you must meet the following requirements to qualify:
- A credit score of 640 or higher
- Your housing payment must be less than 29% of your gross monthly income
- Your total debt ratio of must be less than 41% of your gross monthly income
- No collections in the last 12 months
- Have stable employment and income
It is essential to understand that your eligibility income and qualifying income are two different things. Eligibility income is the total household income, which includes all adults earning an income in your home. Qualifying income, on the other hand, is only the income that you (and any co-borrowers) earn.
For example, if you buy the house with your spouse, just your income and your spouse’s income count toward the debt ratio to qualify for the loan.
The USDA program is an excellent low-income home loan. It can help you buy a home if traditional loans are out of reach. Make sure you shop around to find a lender that offers the terms you want on your USDA loan to make the most of your investment.