The USDA Guaranteed loan program, managed by the federal government, is an excellent choice for those looking to buy a home without a down payment. This zero-down option is accessible to borrowers who satisfy the income limit criteria and are buying a property in a USDA-approved area.

USDA Loan Requirements

• The property must meet USDA eligibility criteria and be located in a qualifying area.
• Household income should not surpass 115% of the area's median income.
• The home must be the borrower's primary residence.
• Borrowers must be U.S. citizens, U.S. non-citizen nationals, or qualified aliens with a valid Social Security number and work authorization.
• A minimum credit score of 600.
• Stable employment.    
• Applicants must be unable to secure a conventional mortgage.

USDA also provides its Direct Loan Program for homebuyers with lower incomes, which can be applied for directly through USDA. This article concentrates on the Guaranteed Loan Program offered via USDA-approved lenders.

Credit Score Requirements

USDA does not have a set minimum credit score. Instead, they use a system called GUS (Guaranteed Underwriting System) to look at each loan application. This system checks credit history, job history, and savings. However, GUS does not approve loans. The lender is the one who decides if the applicant qualifies for a loan. To help with this, lenders set their own minimum credit scores. For example, UHM has a minimum score of 600. This helps many people who may not qualify for FHA or conventional loans.

A non-traditional credit history can also work for a USDA loan. If someone chooses not to use regular credit, it will not lead to a loan denial. Non-traditional credit can include payments like rent, utilities, and cell phones. Usually, this type of credit requires 12 months of payment history. You can prove this with canceled checks, third-party verification, or a special non-traditional credit report. Remember, non-traditional credit cannot replace bad credit; it only helps when someone lacks regular credit references.

Can Closing Costs Be Rolled Into The Loan?

USDA is the only government or regular loan program that lets you include closing costs if the appraised value is higher than the sale price. Appraisers usually round the market value to the nearest thousand dollars. For example, if you negotiate the sale price to $201,30, the appraised value might be rounded up to $202,000. Appraisers acknowledge that their work isn't always precise to the exact dollar. This extra $700 can help pay for your closing costs, which is one of the many perks of using a USDA loan.

What Property locations are Eligible?

It’s surprising that 97% of land in the United States is eligible for a zero down payment loan from USDA. The loans are meant for areas that are not urban or densely populated. USDA defines this as an area with a population of less than 35,000.  It’s important to check specific property addresses because homes across the street from each other may not both be eligible. The boundaries are not always drawn by zip code, city or county lines. You can look up a property address using the USDA Eligibility website. Enter the property address and locate the pin. A pop-up box will clearly state if the address is located in an eligible area.

Compare USDA Loans to FHA Loans

USDA and FHA are both great options for low down payments when buying a home. You may hear about FHA more often because more lenders offer it. However, it's important to see if USDA is an option for you. Choosing USDA can save you thousands of dollars at closing. You can use these savings for moving costs, repairs, or decorating your new home. Having extra money in the bank for unexpected expenses is also a good idea.

The process for getting approved for FHA and USDA loans is quite similar when looking at income and assets. The biggest difference is how much you need to spend to get into the home at the beginning. 

Here is a general comparison of USDA Loans and FHA Loans for a 30 year loan:

You can see that both programs have an up front and a monthly fee and that the USDA fees are lower than FHA. The interest rates are generally comparable but always worth checking. All other closing costs will be comparable.

 Housing and Debt to Income Ratio for USDA

The USDA uses two main ratios to decide if you qualify for a loan: the housing ratio and the debt-to-income (DTI) ratio.

The housing ratio should not be more than 29%. This means your total house payment, which includes mortgage insurance, property insurance, and taxes, should be about 29% of your gross monthly income. For example, if you earn $6,000 a month before taxes, your total house payment should be around $1,740. Some people may feel okay with a higher payment if they have enough savings or little other debt.

The DTI ratio has a maximum of 41%. For someone making $6,000 a month, that means their monthly debt should be no more than $2,460. This includes debts shown on your credit report but does not cover utility bills or childcare.

Always think about what you can comfortably pay each month, no matter the loan program. Your house payment should fit well within your earnings and expenses. Keep in mind that lenders may not count all your expenses. It’s important to create your own budget to find the right payment and DTI ratio for you.

Common Myths About USDA Properties

USDA loans help people with low to moderate incomes buy homes. Many myths exist about what properties qualify for these loans. Here are some key points to clarify what is acceptable for a USDA property:

• Barns: Barns, silos, or livestock buildings can be used for storage. However, if they are used for running a farm or any business, the property won't qualify.
• Land: USDA doesn't limit how much land you can have. You can have a garden that makes a little money. But if you have large-scale farming or income-generating land, it won’t qualify.
• Business Use of Home: You can run a home business like childcare or selling products, as long as it doesn't need special commercial features. However, if you want to board horses for a business, the property won't be eligible.
• In-Ground Pools: USDA loans do allow in-ground pools on existing homes. Check with reliable sources like UHM for accurate details.
• New Construction: USDA loans can be used for new homes. Make sure to find an experienced lender if you need a loan to build a new home. UHM has been helping with USDA financing for new homes for many years.
• Rehab and Repairs: USDA also offers loans to fix up a property. The rules for repairs are similar to those for FHA loans. UHM provides USDA rehab loans as well.

Saving for a down payment can be difficult for many. Fortunately, options like the USDA loan exist to help more qualified buyers find a home!

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.