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2022 USDA Loan Requirements (For First-Time Home Buyers)

Certified Mortgage Advisor
NMLS 1701021
August 6, 2022

Everything you need to know about USDA

USDA is a fantastic loan. If you're looking for a zero down payment and in this video, I'm gonna walk you through all of the loan requirements for USDA loans, walk through all of the ins and outs and nuances to help you decide if this is the right loan for you. And if so, how to apply for one in the best way possible.

0% Down payment

So the most notable thing about USDA is that it is 0% down. Most of the time, other loans tend to be anywhere from three to 5% as a down payment and that's of the purchase price, USDA does not require any down payment at all. And what's nice is this is not down payment assistance. Often people will use something like an FHA loan that requires three and a half percent down, and then they'll get down payment assistance on top of it to reduce or remove their down.

The problem here is normally the rate is increased or there are other terms with that down payment assistance, USDA does not operate like that. And it is just strictly 0% down.

Direct vs. Guaranteed

Now there are two main different types there's direct and it is guaranteed.

USDA Direct

USDA direct is only offered directly through USDA and it's for low-income borrowers.

USDA Guaranteed

The guaranteed program is aimed to serve loads of moderate income. Now, guaranteed. It can be offered by multiple lenders across the country. And then it's going to be secured by USDA.

Insured by USDA for "rural" areas

Now, USDA only ensures what they call rural areas. And generally, this is an area with less than 35,000 people. And I'll walk you through an interactive map so you can see what areas you want to look in. Now, most people can extend their commute to around 15 minutes and be in a USDA Eligibility Area.

Options for a one time close construction loan

Also, you do not have to be a first-time home buyer, and there are options for a one-time close construction loan where you can buy land. And then also finance the construction of a home with a one-close USDA loan.

It's not easy to get

However, these can be hard to get. There are not a lot of lenders who do them and the process can be a little bit frustrating. So it's an option that I wanna make you aware of, but just keep in mind. That's not gonna be the easiest to go through compared to just a traditional USDA.

USDA Experiences

Here are a couple of experiences that people have gone through with USDA and these are comments from last year's video that I made on USDA loan requirements. So Diana said that she was able to buy exactly what she wanted with zero down. They also had to bring $1,475 to closing, and that's just the closing costs.

USDA in a nutshell

So what is USDA? USDA obviously stands for United States Department of Agriculture, and it's a loan for rural areas, but it's a primary residence loan. So if you're looking to buy your first home to live in or a second residence, and it's the second time you purchase a home. and it's for rural areas and has nothing to do with meat, even though this is the USDA.

Government loan offered by different lenders

It is a type of government-backed loan offered by many different lenders. You don't go directly through USDA for a USDA-guaranteed loan. You go through a lender who then works with USDA.


Also, a loan approval through USDA is based on software called GUS. It's the Guaranteed Underwriting System, and basically what this is doing is it's taking all the information about you and the loan you're getting.

So what income do you have? How long have you been employed? What's your credit score? How much is the home worth? This software then is going to give you an approval or what's called a Refer, which is basically the thumbs-down version of this underwriting software. So GUS is what's being used here. A loan officer's gonna take your information, put it into GUS, and see if you have the approval or not. If you're not able to get approval through GUS, there are options called Manual Underwriting to be able to get approved.

Pick a helpful team

So again, this is gonna be super in-depth as we go through this, but a quick side note is navigating this process can be frustrating. And often it's really helpful to assemble a team of really helpful people around you. So if you're looking to build that team and you'd like a referral from me for someone that I trust you can talk with a helpful loan officer or a helpful real estate agent or both, if you like to.

You can look for a loan officer, you can go to WTHYL - Lender. And for a real estate agent, you can go to WTHYL - Agent. We have a network of fantastic loan officers and fantastic agents who would be happy to help you take the next step and help you avoid some of the confusion of going at this alone.

COVID changes

Now let's talk about some COVID changes, COVID through a wrench in all kinds of mortgage lending and home buying. So I want to make sure that you're aware of this as we're in the middle of 2022.

Credit overlays are disappearing

Credit overlays used to exist where USDA technically has a minimum credit score of 500, which I will discuss more in-depth about the credit scores. Often lenders are putting what's called an Overlay. Basically, it's an artificial rule to help protect them. And they're raising the credit score up to 640 and 680.

Some lenders are still doing down to 500, but this is on a lender by lender basis. If you find a lender who isn't offering the bare minimum, of USDA requirements, then you can always keep shopping to find one that works for you. So credit overlays are disappearing. This is allowing more access to these loans.

Exterior only or desktop appraisals

Also with COVID, there's been flexibility for exterior only or desktop appraisals. So instead of it being an appraiser going and doing an interior inspection of the home and an exterior, there is the option for just exterior or just a desktop appraisal, which is basically thought of it as a software version of an appraisal. So USDA states, if an appraiser is unable to personally inspect the subject property, the home you're buying, but either interior or exterior means due to either state or local emergency health orders, then they can use an exterior only or a desktop appraisal.

May 2, 2022- May 2,2023

One other interesting change because COVID is starting from May 2, 2022, to May 2, 2023, non-US citizens with a valid Social Security number and work authorization are eligible to get a USDA loan until this one-year gap.

Down payment

First, let's talk about the down payment. Of course, we talked about this zero and there is no catch to this. It is 0% down. If you're buying a home that is $300,000 with USDA, you will get a loan amount of $300,000. There is mortgage insurance. But your base loan amount, it's going to be the same as your purchase price.

No USDA if you can get a Conventional

Now with USDA, they do have this one weird stipulation that usually doesn't trip up most people, but basically, they say you can't get a USDA loan if you're able to get a conventional loan, right? If you have hundreds of thousands of dollars in your bank account, they don't want you to have access to the 0% down. So what they say in the rules for USDA is they say, you must not have liquid funds. Not retirement accounts, liquid funds to put 20% down, plus closing costs on a 30-year conventional loan.

So if the home you're looking at is $300,000, 20% down is $60,000. If you have less than $60,000, plus they're gonna estimate closing costs. So let's say $70,000. If you have less than that, then you would be able to move forward with a USDA loan and explore if you can qualify for the rest. If you have more than that amount then you may run into an issue where they look at you and say, you actually can qualify for 20% down on a conventional loan. And so you likely won't be able to move forward with a USDA loan.

Closing costs

Now, this trips up people a lot. USDA, even though it is 0% down, there are still closing costs. When you're buying a home, you have your down payment. Plus your closing costs and that equals the total amount that's going to be due at the closing table. So even though the down payment is zero, you do still have closing costs and they're very similar to other loans.

You're going to have an appraisal. You're going to have a credit report fee. Most likely you're gonna have title fees to do a title search and insurance. You're gonna have recording fees, potentially transfer taxes. You're also going to have homeowner's insurance, property taxes and a few other things in there.

Closing cost depends

So keep in mind that you still will need money to bring to the closing table. Although sometimes people can bring zero to the closing table. It really just depends on how your offer is constructed.

1% Guarantee fee

So closing costs still exist, even if you put 0% down. There is a 1% guarantee fee. USDA charges, an upfront mortgage insurance, and it's added to your loan amount. It's financed.

You cannot waive escrows

When you get a USDA loan they're going to set up a side account for you. It's still gonna be your money. They're just gonna hold it in there and it's gonna be for property taxes and homeowner's insurance. And basically why they do this is because often your homeowner's insurance bill is due annually and your property taxes, at least in Ohio are semi-annually. So a lot of people can run into the point where they get maybe an insurance bill for $1,500 and they don't have the money for it.

So instead of you paying the mortgage company monthly, they set aside your insurance and tax money in a separate account, and they will pay your insurance taxes from that account.

The only downside to this is its part of your closing costs. They need a few months of taxes and a few months of insurance in the account when you close. So that is part of the closing cost. you cannot wave that when normally you can in something like a conventional loan.

You can get seller credits

So when you negotiate in your purchase contract with your realtor, you can ask the seller to pay a portion of the purchase price towards your closing costs. So for instance, you might go to the seller, let's say you're buying a $300,000 home, and say, I'd like you to give me a 1% seller concession. They would then give you $3,000 at the closing table to help offset your closing costs.

How Tax Proration

Tax Proration is a thing that can help. This is basically where the seller will give you credit for the taxes of the time that they lived on the property. So for insurance, let's say you just bought the home.

You're gonna have a tax bill that's gonna come due. And may at least in Ohio, since it's paid semi-annually that tax bill will be for six months. Now you may have only lived in the home for one. So why are you paying six months? What ends up happening is you pay the upcoming bill. You lived in the home for one month. So you're only responsible for one month of taxes. So at closing, the seller will pay you five months' worth of tax credit to you for that upcoming bill. So that is something that can help offset the costs.

I've done USDA loans with people who have brought literally $0 to the table. I've also done USDA loans where people have brought a few thousand to the table so it really depends on how you set up your offer with your realtor, and weigh what you ultimately are looking for.

Proof of funds

So proof of funds, you do need to who USDA where you got your money from. Unfortunately, this is one of the most annoying parts of getting a mortgage is the verification of money. It's a lot of things since the Patriot Act after 9-11 or they're checking for money laundering and terrorist activity and all that kind of stuff. And they wanna make sure you didn't just borrow money to buy this house because they see that as risky.

2 months or something like a 401k loan or a secured loan

So you need to prove where you got your money? They do that through two months of bank statements or something like a 401k loan or a secured loan. You can get a gift from anyone that doesn't have an interest in the property, like the seller, the builder, the agent, the lender. So you could get a gift from a parent, from a cousin, if you'd like to, that can help you pay those closing costs.

No unsecured loan

You cannot have an unsecured loan, so you can't go get a credit card cash advance. You cannot get a personal loan to pay your closing costs.

No cash on hand, let it season

Also, you cannot use cash on hand. you can't just show up and say, I have $6,000 in cash. You can't do that. Unfortunately, if you have cash and you need to use it to purchase a home, you're going to have to put that into your bank account and let it be what we call season. So basically let it sit in there for over two months to be able to then use it for your loan.

Large deposits will be checked

Also, an underwriter's gonna check for large deposits. This is one of those things that they check for money laundering. So basically anytime they see a large deposit and they say a non-earning related deposit may need to be sourced. This is super vague because it is up to the underwriter's discretion.

Basically, if they're looking at your bank statement when you send those to them and they see. You got a random deposit for $5,000 in here. Where did that come from? What did you get cash from somebody? Did you get a personal loan? They need to see where it came from. And so this can be a little frustrating because it iscompletely up to the underwriter's discretion.

If it's payroll related, then that's no problem at all. They'll see that as payroll. So just be prepared for that. This often happens when someone has cash and they throw it into their bank account and think they can use it. Unfortunately, that's not possible on USDA.

Credit score

With your credit score. Most people have three credit scores. You have one from Equifax, Experian, and TransUnion, and so you'll have, different scores with each of them. USDA like a lot of other loans is going to use your median score. So in this instance, they would use 636. That is the middle score. They're gonna act like the other two don't exist and use the 636.

Minimum is 500

Now the very bare minimum USDA credit score is 500 credit score. However, if you have a 640 the doors open up.

Below 640 is just difficult!

Anything below 640 becomes really difficult with USDA. There absolutely are lenders who will give you a USDA loan below a 640 credit score. However, there are far more that will give you a USDA loan, above a 640.

The reason for that is we talked about GUS earlier. 640 is the minimum credit score you need to get a USDA loan with a GUS approval, right? So it's a lot easier if they can put your information in and the computer software says, this looks good to us and you're approved for the loan. If you're below a 640, you can't use GUS instead, an underwriter has to manually review your loan. This takes more time, more paperwork, and can often have a slightly increased rate as well.

640 & above to make it easier

So the minimum is 500, still 0%. I've done USDA loans, I've done VA loans. I've done FHA loans all the way down to a 500 credit score. It absolutely is possible, but the world becomes so much easier if you have a 640 and above.

So less than 640 can limit your ability as well. It can shrink how much you get approved for and just be careful, really quickly of lenders who might direct you to other programs. Unfortunately, there are a lot of loan officers who aren't familiar with USDA I'm very familiar with USDA because I live in an area that has a small Metro, but then is surrounded by a lot of USDA Eligible Areas.

Talk to a knowledgeable lender

So it's very common where I live, but there are a lot of lenders because they're not familiar with it. They'll direct you into another program. You might have a 580 credit score and they're like, oh, maybe we go FHA. When in reality you could qualify with USDA. If that loan officer was more versed in USDA.

So talk to multiple lenders. If you don't hear what you like the first time and ask for explanations, Hey, can you tell me why I didn't get approved or why you're recommending another loan?

Credit Events

So for credit events here, anything that's a deed in lieu, foreclosure, or short sale. You're gonna have to wait three years from that transfer to be able to qualify for USDA.

Chapter 7

If you had a Chapter 7, you're also gonna have three years waiting period as well.

Chapter 13

If you had a Chapter 13, you need to be 12 months into an on-time payout and you need court permission as well to get a USDA loan.

IRS Lien

If you have an IRS lien, then you need three on time payments on a payment plan.

Mortgage late

Then also for any mortgage late, if you currently have a mortgage, which most people don't get a USDA loan, but if you already have a mortgage you can't have more than one 30-day late in the past 12 months.

Interest rates

If you wanna look at the average interest rates for USDA, you can go to WTHYL - Rates. I have all the rates there. National averages for all different kinds of loans.

Lower than other loans

Usually, USDA rates are lower than conventional and usually comparable to FHA loans. Now, even though the rate is lower than conventional, USDA does have mortgage insurance that stays on for the life of the loan.

Brokers often have better rates

So that might be a consideration when you're shopping for different lenders. You can get one interest rate that the loan officer tells you, and it costs $0. That's just the rate they're offering. Now you can increase the interest rate and actually receive a credit towards your closing costs. And the opposite is true. You could decrease the interest. And increase your closing costs by basically prepaying interest. So it works both ways.

The main reason I say this is because if you're getting a USDA loan, you likely wanna bring the least amount of money to closing as possible. So that is an option that you can do. Keep in mind, that increasing the rate will increase the amount that you pay in interest over the life of the loan. So just something to keep in mind there.

Mortgage insurance

So if you do get a USDA loan, you will have two types of mortgage insurance on your USDA loan. First, there is an upfront guarantee fee wrapped into the loan this is 1%. You also have what's called an annual fee, but it's paid monthly and this is 0.3, 5% of the loan amount. This is collected monthly. It lowers each year, but it will never fall off. Okay. Even if you hit 20% equity in your home, it will not fall off unless you refinance into a conventional loan and you have more than 20% equity. Okay. So you have to refinance out of the USDA loan to get rid of mortgage insurance.

How this works

Let's say you get a $300,000 loan. So this is the same thing as buying a $300,000 house, 0% down means you have a $300,000 loan. Now that's the base loan amount. USDA is gonna charge 1%. So that's $3,000. So your new loan balance is $303,000.

Here's the weird thing about USDA loans. You bought the home for $300,000. You have a loan for $303,000. Your loan amount is higher than your purchase price. So if you're wanting to buy a home for a short amount of time, keep that in mind because you have a higher loan balance. If you sold the day after you bought your home, you would have to bring money to the closing table to sell your home to pay off the higher loan balance. So do keep that in mind with USDA, I would air on the side of expecting to stay in your home for around seven years.

Anything shorter than that, that you're planning on. I might recommend staying away from this loan because you might not have enough equity to sell without bringing money to the closing table. So that is your upfront fee wrapped in your loan balance.

For the annual fee, which is paid monthly. So we think of it like mortgage insurance, even though it's our private mortgage insurance, unlike a conventional loan. It's not exactly that they call it an annual fee, but it functions the same way. So this is 0.3, 5% of the loan amount, which would be $88.36. The way I got there was by taking the loan amount times 0.035, and dividing it by 12.

Why do we need mortgage insurance?

And often people have questions about what is mortgage insurance. Why do I care about it? Mortgage insurance exists to protect the lender in case you don't pay back the loan. It is the only insurance for the lender. It is required.

There's no way around it on a USDA loan. It does not benefit you at all, but it is one of the things required with USDA you get 0% down and a low rate. And in return, they get mortgage insurance. That's what funds the USDA program. It helps them give out more loans. So it's one of those pro-cons weigh, the good and bad of these different loans.

Property requirements

There are way more rural areas than you think. So what you can do is you can Google USDA Eligibility Area. It's gonna take you to this website. You just click the little disclaimer, and we're gonna zoom in on my location. So I live in Dayton. Now everything in orange is ineligible for USDA. That means everything out here. That's not orange is eligible. This will work for USDA fantastic.

So let's say I wanted to buy a home in a day. Or let's say I want to live near Dayton. Unfortunately, all these areas does not qualify for USDA. However, I can look at buying a home in an area right here, like Tipp City. Tipp City the entirety of this qualifies for USDA 0% down. Now, I know that Tipp City and Dayton are only about 15 minutes from each other. So if I had a job downtown, if I extended my commute to 15 minutes, As much as I'd like to live downtown, maybe I really need the 0% down. So that's an option.

There are so many areas that are like this, where the Metro's not going to qualify for USDA, but the surrounding areas will. And maybe you don't wanna live there, and that's perfectly okay. There are a ton of loan options that still work downtown in these areas. But if you want the 0% down, this is what's needed to get that loan. Also, it has to be a primary residence. You can't use this as an investment property. You can sell it anytime you want. So you can buy and sell the next day. If you'd like to no consequences there.

Regarding renting your USDA home

However, if you want to rent out your home in the future, you have to live in it for one year. So you can't live in the home for six months and then rent it out. If you're gonna do that, you have to refinance it into an investment loan.

Primary residence

However, if you live in the home for 12 months and then you're like, I think I'm ready to buy another house. You can rent out that home without refinancing.

Cannot have income

You cannot have any income-producing land or buildings. Big farms, even though this is a rural loan, it's not a farm loan. Even though it's a rural loan, you can't have cattle, you can't have any sort of livestock. You can't have crops. No income-producing land. If you work from home, that's fine. What they're mainly saying here is as the primary purpose, if there's a huge farm, the primary purpose of that land is a farm. If you happen to have acreage and you have a small business selling soap at home, that's not the primary usage of the land. That will work as long as you're not running full-on huge business operations out of this place and building, a factory. If you have a home business that is okay with USDA.

Buy as big as you want

There's also no acreage maximum. However, what you do has to be home. This is not a land loan. You can't just buy land with this unless you're using a construction, USDA one-time closed loan, no acreage maximum here.

Appraisal Highlights

So when you get a USDA loan, you're gonna have an appraisal and basically, an appraiser's gonna come out and they're gonna say that $300,000 home that you're buying, is it worth $300,000, right? They're gonna give you money for it. So they need to make sure it's worth that.

Closing cost wrap

One of the interesting things about USDA is that if your appraisal value comes in higher than your purchase price, you can actually wrap your closing costs into the loan amount. So for instance, let's say we're buying a $300,000 home, and let's say the appraisal comes in at $310,000.

So you're basically buying your home at a nice discount. If that's the case, and let's say your closing costs are $5,000, your loan amount. You can actually wrap that in. You could take out a base loan for $305,000, and then you'd also have a 1% guarantee fee on top of that.

No fixer upper please

USDA is concerned with what they call health and safety, structural soundness, and protecting the property value. The best way to think of this is something that's move-in ready. It's stricter than a conventional loan because it is government-insured. So here are some big issues on USDA. Broken glass, chipping paint, plumbing issues, exposed wiring, broken HVAC, rotting, wood, and a wet basement or crawlspace. These will need to be adjusted before you can get a USDA loan.

Again, think the move is ready. It doesn't have to be super, pretty, and renovated. It just can't be a fixer-upper.

Home example 1

So I wanna show some sample homes because every once in a while sometimes, we can hear about these programs and think, okay, but is that actually true? What do these numbers look like? And so I'd like to go and see what homes were listed at the time of making this video and show you what some of the numbers would look like.

So this is a home in Tipp City like I talked about earlier with the eligibility map and this home is listed for $299,000. It's a four bed, three bath, about 2,600 square feet, 0% down. So $0 down payment. Closing costs, I'm just using a rough estimate, probably somewhere around $7,500. The principal and interest payment for your loan would be $1,734.

The mortgage insurance would be around $87 taxes, $203 homeowner's insurance, $111, and no HOA. So that would bring the total of this $300,000 home to about $2,135 per. This is just based on averages. This is not a quote. Okay, please keep that in mind. So this is a nice little home $300,000 for around $2,100 per month. Of course, you're still gonna have utilities and things like that. But this is what the mortgage payment might look like with USDA.

Home example 2

Here's another one as an example, this is in Manor, Texas. This is just shy of $400,000 for three a bed, two baths roughly 1700 square. Really nice home.

0% down again. Closing costs. I'm gonna estimate these closer to $10,000. Principal and interest payment. $2,314 mortgage insurance would be $116. Taxes, 416 per month. Homeowner's insurance, $148, and then there is a small HOA of $30 per month on this. This would bring your total monthly payment to around $3000 here with a USDA loan.

No loan limits

USDA does not have loan limits. Instead of loan limits, they have a little tricky thing here. So no limit loan limits, they do have though an income limit that basically functions as a loan limit. So because there is a loan limit, it limits how big of a mortgage you can get, so even though in theory, there's no loan limit and you could technically get a million dollar mortgage with USDA, your income would have to be too high to qualify for that home. So it kind of functions as a loan limit in a weird way.

Household income

Now one weird quirk about the income limit is that even if just you are applying for the USDA loan, they're actually going to look at all household income for adults 18 or over. So even if just you are on the loan, if your spouse or your partner, or you have a child over 18 who makes money that will be factored into the income limit. Something to be aware of.

USDA guaranteed

They say is for moderate-income individuals and can extend down to low income.

115% of Area Median Income based on family size

And they base the income limit on 115% of the area median income. And this is based then on family size. So I wanna show you a tool of how you can figure this out for yourself. Again, you can just Google USDA Property Eligibility. On the same page just click income eligibility, and we have to go through a quick little questionnaire because it is conditional based on your location, and family size. A number of people, we can see the number of residents under 18. It's gonna ask us a few questions about anyone disabled or anybody 62 or older, who will not be included in the income calculation.

Just for this example, what they're offering here is like they're saying like put in your income and they'll tell you if you qualify or not, I'm gonna put in a fake income of 5,000 a month, click finish. And so we can see, that the guaranteed housing loan program's maximum adjusted household income is $103,500. So if you're below that household, keep that in mind, household, then you can qualify for USDA. If you're above that, you will not be able to qualify for USDA, and please keep in mind. This is household income. Even if those people are not on the loan.

Income and employment

USDA does expect staple income and employment and looks for a one to two-year job history. Doesn't have to be at one particular job. They prefer to see two years of history, but one year can often be acceptable. There is no minimum for a particular position. Alright, keep that in mind. It's not two years at one job, just a two-year history. They wanna see the consistency in your income and employment. Even if you work multiple jobs over that two-year period.

Retirement is an acceptable kind of employment

So if you get a pension, Social Security, or things like that, that is your employment history.

Non-taxable income

So things like Social Security benefits can be grossed up because lenders work on gross income. So let's say you make $60,000 per year. You only probably net take home maybe somewhere around 45,000, but the lenders use 60,000 for how much you can afford based on their risk.

So non-taxable income. They have to add padding to it as if taxes were on it. So the way you do that is you take your amount multiplied by 1.25. And so you'd be able to qualify with that $2,000 tax-free income as if it were $25,000 taxable income.

If you are self-employed

The self-employment minimum is two years. You need to have a minimum working self-employed.

College counts

For two years college does count having an education does count towards your employment history there.

Affordability and the DTI

So affordability, USDA like a lot of other loans uses an affordability metric called the debt-to-income ratio, and so there is what is called a front-end and a back-end.


The front-end is your future mortgage payment divided by your gross monthly income. The back-end is your future monthly payment. Plus any monthly debts you have. So things like car loans, student loans, personal loans, and credit cards it does not include groceries or gas. Other expenses that are not debts.


So the back end is your future mortgage payment. Plus your monthly debts are divided by your monthly gross income.

NPS debts

If you are in a community property state, and you can Google that, am I in a community property state? You must include your non-purchasing spouse's debts. So if you're buying a home but your spouse is not going to be on the loan and you're in the community property state, you will need to include their debts in that consideration, if you want their income as well, you also have to consider their credit score and add them to the loan.

Max purchase price

Now, if you wanna figure this out, I do have a calculator called the Max Purchase Price Calculator. You can plug in some of the numbers and just see an idea of what you could afford based on the debt-to-income ratios.

GUS (Front-end and back-end)

Here is GUS versus Manual Underwriting. We've talked about Gus already. So the ratio maximum for the front-end is 33.99%, and for the back-end is 45.99%. Now two caveats here, just because you could get approved by a lender for a mortgage at a certain amount in payment. Doesn't mean it's financially smart for you to do that.

The lenders are only worried about the risk of you paying back. They do not care about your personal financial situation. They are not your personal financial advisor. So please keep that in mind. Also, these are not published things, right? USDA didn't come out and say, here is what the ratios are.

Here's what the maximums are. These are what people have found through guests, through testing a bunch of different loans. What it looks like the maximums are. All right. This is the maximum that people have seen get approved. So for example, let's say we're looking at a $70,000 per year, gross income.

The front-end would be $1,983 per month. That means that's the maximum mortgage payment you could get with that income. The back-end would allow you $700 per month. If we maxed out our mortgage payment to this. It would allow you an additional $700 per month in something like car loans, student loans, credit cards, and personal loans.

Manual underwriting (Front-end and back-end)

Now with manual underwriting, anything less than a 640 credit score is going to reduce your affordability. I talked about that earlier. It reduces those ratios. So the front-end gets reduced to 29%. And the back-end gets reduced to 41%. Now, keep in mind that just because we're seeing these here doesn't mean that it will automatically work that way for you, right?

To get all the way to the maximum of these ratios. You need to have a really high credit score. If you have just a 641, you may not be able to go all the way up to a 33.9, 9% on the front end. GUS may limit the amount that you can afford. So these are more flexible and unfortunately, there's no way to tell you exactly what they are, cuz they're not published.

So it's something that you have to talk with a lender to see if you can qualify. So in this same example, 70,000 a year income, would be 1692 per month. And then this would also offer you $700 in a room for extra debt payments. Now if your debts are above $700 per month, that will eat into the monthly payment and reduce that number.

Ratio Waivers

USDA also has what they call Ratio Waivers that allow you to have up to a 32% front-end and a 44% back-end. And these require compensating factors, which I will talk about here in the future.

Student loans

People sometimes think that with student loans, they can't qualify for a mortgage. You absolutely can. Tons of people can qualify for a mortgage. Even if they have student loans.

CAIVRS update

Now, USDA looks at a program called CAIVRS. And basically, what CAIVRS is it's a list that the government has, where if anybody has defaulted on the federal debt, like a federal student loan, then you get put on this list called a CAIVRS, and then anytime you try to get another government loan, like a USDA one, they're gonna check the list and see if you didn't pay back the federal student loan, why would we give you more money? And so if you're on CAIVRS, you can't get qualified for a USDA loan.

However, there has been a recent ruling with student loans where CAIVRS or loans that have been what are called delinquent have been lifted out of delinquency. And so check with the Department of Education to see the status of your student loan.

IDR allowed

Income-driven repayment is allowed on a USDA loan. So the rule is if the payment is $0 per month or deferred. Then you must use 0.5% of the balance included in the debt-to-income ratio. However, if you're on income-driven repayment and your payment is a hundred dollars per month, then you can use that, right? If your normal student loan payment would've been $500 per month, but you're on income-driven repayment. It's only a hundred. You can use a hundred.

But if your income-driven repayment is $0 per month, then you have to use 0.5% of your student loan balance. It's frustrating and annoying. So for example, a $50,000 student loan balance would be 250 per month based on 0.5% of the balance.

Manual underwriting <680

So the ideal situation is your loan goes through GUS and you get that approval. However, if your loan gets put through GUS and you get the thumbs down, you have to do what's called Manual Underwriting, where an underwriter's gonna take a little more detailed look at your loan file.

If you have less than a 680 credit score, then your ratios are maxed to that 29/41 that we talked about earlier.

Manual underwriting >680

If you have greater than a 680, it can go up to 32/44. As long as you have one of the following, either the mortgage payment principal, interest taxes, or insurance is the same or less than the current housing payment.

So what do you currently pay in rent or mortgage, or do you have three months of reserves for your future mortgage payment, or you've been with your current employer for two plus years.

Seller credits can be less attractive

We talked about this earlier. This is where you can negotiate for the seller to pay a portion of the purchase price towards your closing costs. Now you can do up to 6%. If you're looking at buying a home, you can go up to six. You cannot ask for more than 6% of the purchase price towards closing costs. Usually, six is more than plenty to cover all your closing costs. Now keep in mind, that seller credits can make your offer less attractive.

You're basically asking the seller to cut into the amount that they would be able to profit from their home. Often, what can happen is you can negotiate your purchase price to be higher, to compensate for the seller credits that you may be asking for. So for instance, let's say you're looking at purchasing a home that's $300,000 with down payments of zero. Let's say closing costs are $6,500. And you ask the seller, Hey, we're gonna buy for $350. Could you give us 1% back as a credit? So $3,500, $6,500 minus $3,500 is $3,000. This is what you would bring to the closing table.

Sometimes in talking with your realtor about this, you might be able to say, maybe the seller says we don't wanna do that. I don't wanna give you an extra, I don't wanna give you 3,500 bucks. You could negotiate to increase your purchase price and say, okay, we'll offer $353,500. Could you give us 1% back? The math works out to be very close to this number.

USDA Conditional Commitment

So some special requirements feature that doesn't fit into some of these buckets. USDA is a little weird and it has what's called a Conditional Commitment. So normally what happens with a loan is. You get preapproved by a loan officer. Then when you find a home, your loan officer takes all the information that you gave them and then sends it to an underwriter. And the underwriter gives you what's called Conditional Approval. Then you have an appraisal done and maybe a couple of extra documents. Then you have a clear to close meaning the loan is completely done. You're in the clear and you're ready to close on a home.

Has a longer turnaround time

USDA is a little bit different in that an underwriter package up the whole thing and they make sure all the boxes are checked and everything looks good. Then they're actually gonna send it out to USDA to review. So there's basically an audit done by USDA on your loan file. And this really can change how long it takes based on where you're at and how busy everybody is. So usually I would say this is probably gonna be around anywhere from two days to seven days. Check with your loan officer on current USDA turn times in your area. But what happens is your underwriter is gonna send this to USDA. USDA is gonna look it over. They're basically gonna look at it a second time and then issue a conditional commitment. The wording of that doesn't really matter. They give it back to the underwriter. The underwriter then will give you a clear to close.

So just keep that in mind, USDA loans often will take a little bit longer of a time to close than something like a conventional loan or even an FHA loan.

OTC loans

Also, there are the one-time construction loans that I mentioned in the beginning. They are hard to find though.

Rehab option for up to 35k

There are rehab options, for up to 35,000 in nonstructural repairs. And then also you can get more if you need structural repairs, the same thing with the one-time close, though, these can be difficult to find lenders who offer those programs.

No credit score, no problem!

You also can get a USDA loan. If you have no credit score, a low credit score is different than no credit score. If you have a 400 credit score, you won't be able to get a USDA loan. If you have no credit score, you can get a USDA loan through what's called nontraditional credit. And so basically they're looking for what are called trade lines.

Think of it if you had a credit report, you would have a student loan, a car payment, and a credit card. Those would be three trade lines. They're basically saying if you don't have any of those things, we need to see that you have payment history on time with accounts that you have. So often this is used with something like verification of rent.

So they'll look at 12 months of on-time rent, payments things like the history of utility payments or things like insurance leases, internet, phone, bill, things like that to just see, have you been paying things on time? They wanna see a history that you have, and they'll use that as nontraditional credit if you have no credit score.


Then for refinancing. So you can get a USDA loan and then you can actually refinance that USDA loan to get a lower interest rate. USDA is interesting that they have more streamlined options. So they have what's called streamlined and streamlined assist. On both options, your rate cannot increase.

Sometimes people will refinance at a higher rate because they'll pull cash out or they'll do something more interesting by rearranging their debts around USDA. Your rate cannot increase and also has to be a 30-year fixed refinance.

No cash out options

Also, something to keep in mind is there are no cash-out options. There are other refinances.

Streamline vs. Streamlined assist

So here's a comparison of streamline versus streamline assist. You do have to wait 12 months since you first got your USDA loan. There is no appraisal on either of these for credit on the streamline assist, you do not have to have your credit pulled on a streamlined you do.

Debt-to-income is checked on streamlined and not on the streamlined assist. NTB, that's a Net Tangible Benefit on streamlined. You do not have to prove a net tangible benefit on the streamlined assist. Your payment has to be $50 less per month and on streamlined, you can remove borrowers on streamlined assist you can only remove deceased borrowers. You can add a borrower on both. I know this can be confusing. You can talk with a loan officer to explore your USDA options.

So basically if your score increased, this could get you a better rate. This is what mainly this kind of comes down to is if you get a USDA loan, and let's say you had a, a 580 credit score, and then, maybe two years later, your score increased and you wanna get a better rate. Streamlined is the way that you're gonna do that cuz they'll pull credit. If you go with a streamlined assist, they won't be able to use your improved credit score to qualify for the loan.

Can refinance to another loan

Now you absolutely can refinance into another loan type, like a conventional loan. This would often be done. Let's say you build up enough equity. Let's say more than 20% equity refinance to a conventional loan to then remove the mortgage insurance from your USDA loan. Otherwise, you will pay USDA mortgage insurance for the entire life of the loan until it's fully paid off.

Success rate & seller perception

If you're gonna use a USDA loan, how is a seller going to view you? Because when you're buying a home, you're gonna be competing against other buyers, most likely, and some buyers have financing that can be perceived as better than other types of financing. USDA is way less common than conventional FHA. And I would argue VA.

Good real estate agents are uncommon

Now a good real estate agent that's working on your behalf can help explain to the seller more about USDA loans. This can help ease some of the maybe tension around the mystery of USDA because it is a fantastic loan program.

Slow due to conditional commitment

Now, USDA can often be slow because of the USDA's conditional commitment. There was a time when the conditional commitments were taking closer to 10 to 14 days. They're not like that currently at the moment, but when that was happening, that puts me in a very awful situation to have to explain to my borrowers or, the listing agent, why the loan is taking longer than usual. Those are things out of your loan officer's. But they are something to be aware of.

Appraisal can be a pain

Also, the appraisal can be perceived as pain because it's a government loan it's going to want the home to be in better condition than something like a conventional loan. So if a seller is looking at your offer and they say it has a USDA loan and someone else has a conventional loan. You wanna talk with your realtor about how can you make sure that your offer compensates for the fact that USDA could be perceived as a little less than ideal to the seller.

When is USDA a good option

So in really heavy seller's markets that are competitive and you're competing against a lot of buyers, USDA is not gonna be a really strong hand to play. Conventional is better in that option. If we're in a buyer's market and you have more of the control and the sellers don't have as many options, then USDA can be a really good option for you.

How to get a USDA loan

Now, ultimately, how do you get one? Really? It's not super difficult to start this process. You're simply just gonna reach out to a lender. Say, Hey, do you offer USDA loans? Have you done USDA loans? Then apply with that lender to get pre-approved if you would like to talk with a helpful professional either a real estate agent or a loan officer who can walk you through some of the guidelines and help you purchase with a USDA loan.

Email me → kyle@winthehouseyoulove.com
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Allied First Bank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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