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2023 USDA loan requirements (BEST 0% down loan)

Certified Mortgage Advisor
NMLS 1701021
Published 
June 29, 2023

USDA is almost everywhere

USDA is a loan that most people don't know about. It allows you to buy a home with 0% down in most areas. A lot of people don't know about them. They think that they're for farms or they're inaccessible, but in reality, it's available for most people in most areas.

Quick highlights with this program

I'm going to show you everything you need to know about this program, you're going to be more educated than most loan officers are about this program.

So first, the biggest draw to USDA is it's 0% down. It's not a down payment assistance program. It's not a grant that you have to pay back. You don't have any down payment on this loan.

It also comes with a low rate, low mortgage insurance compared to conventional loans, which I'm going to show you here in an upcoming slide as well.

USDA Direct & USDA Guaranteed

There are two different types of USDA loans. There's one called USDA Direct, and one called USDA Guaranteed. So USDA Direct is only offered directly through USDA through USDA's website and it's for low-income individuals or households, and so that is gonna be directly through USDA.

Now what most lenders have is what's called a USDA Guaranteed loan, and that's a loan that our company does as well.  You can apply for a home loan at WintheHouseYouLove.com if you're interested in seeing how we can help you with that.

What is USDA?

Now USDA loans are for what is called Rural Areas, and it doesn't mean there has to be a tractor every, you know, half a mile. What a rural area means is its population size, and I'm gonna show you a tool you can use to see what areas qualify for USDA.

Most people can get a USDA loan if they extend their commute just a little bit. So USDA is not going to work if you're looking at buying in a really big downtown area, what you're going to have to do is extend your commute to a less populated area to be able to purchase with USDA. Also, you don't have to be a first-time home buyer, which is a nice plus. Maybe you already bought a home and you wanna buy another house, but you don't wanna take all your equity and put it as a down payment, you can use a USDA loan.

USDA as a Government-Backed Loan

Now this is a government-backed loan. It's offered by many lenders. So all that it means by government-backed is that the government is the one who makes the rules about this. In this case, USDA is the one who makes the rule about the USDA loan. And because it's government-backed it usually offers pretty great interest rates because it is insured by the government, but it can come with some more strict requirements, especially for the appraisal that we'll talk about.

What USDA stands for

USDA is just the United States Department of Agriculture, which can be a little bit confusing. You know, why are they giving out loans? And it really is to support population growth in these more rural areas. And the approval for these loans is based on what's called a GUS.

What is GUS?

GUS, It's the Guaranteed Underwriting System. Now, when you get a mortgage almost every loan is going to be put through an Automated Underwriting System. Usually just abbreviated AUS. With USDA, it's through GUS, the Guaranteed Underwriting System. All it is, it's a software. It looks at your loan application and basically says, is your loan approved or not.

Kind of gives you a thumbs up, thumbs down is what happens with these underwriting systems. Then what an underwriter does with your loan officer is they're using documentation like your pay stubs and bank statements to really back up the information that you put into the underwriting system or that the loan officer put into the underwriting system.

Pick a helpful team

Now, before we go into all of these details, it can be really overwhelming and you wanna start working with a team as you're looking at buying a house, even if you're in the very beginning stages.

There are two critical people that you need to work with when you're looking to buy a house. Number one is a helpful loan officer, and a loan officer is gonna help you see what you can afford.

Look at all your numbers, like your down payment, your closing costs, and your monthly payment. And then also help you get pre-approved or pre-qualified for a loan so you can start shopping for houses. Now, our team works in all 50 states. We do USDA loans, Conventional, FHA, VA, the whole deal.

Get pre-approved here!

So what you can do is go to WintheHouseYouLove.com/lender and you can go ahead and start an application to talk with our team that way we can help you with a USDA loan or any loan that you wanna look at.

Assist you to get BEST OFFERS here!

Next, you wanna work with a helpful real estate agent. Once you're pre-qualified for a loan, you're able to go ahead and start shopping for properties and hopefully find one that you love. So what your real estate agent is going to do is they're gonna help you find a home that you love. And negotiate the best offer and guide you through that process, so it's not super overwhelming.

So to find an agent I have an agent matching service in all of the US. We'd love to help you connect with a helpful agent. WintheHouseYouLove.com/agent.

Down Payment is 0% easy

So let's go into the down payment on USDA. As I mentioned, it's 0% down. There is no down payment on this loan. On conventional loans, you're going to have to do 3% down on FHA loans, you'll do three, and a 5% down on VA and USDA. it's 0% down.

x Conventional

Now what's a little bit weird about USDA is you can't qualify for a conventional loan and also be able to get a USDA loan. They really want it for people who truly don't have the full amount for a conventional loan.

What are the rules for that?

You must not have liquid funds to put 20% down plus closing costs on a 30-year conventional loan. So all this is saying is if you have a ton of money sitting in a savings account, you know, in other words, 20% down to put on that same house then you won't be able to qualify for USDA.

Most people are not in this situation. But it's something to be mindful of. If you have a ton of cash, you may not qualify for this program.

Closing Costs

Some people kind of get a little confused when they see 0% down, because you still do have cost to purchase a home, and these are called Closing Costs. It's not just what your lender is charging. It's what the lender may charge.

Plus you're gonna have things like, property taxes, maybe transfer taxes, homeowners insurance, you have an appraisal, you have a title search, and you have recording fees. These are all closing costs that are required on every loan with every lender. So your lender can help you put together an estimate of those fees.

Yes, Closing Costs exist

So please keep in mind that closing costs still exist. There is no down payment, but there are still closing costs on every loan. Even if you buy a home with cash, you're going to have closing costs.

USDA has what they call Guaranteed Fee

This is how they're funding the program. The reason why they're comfortable letting you do 0% down is that USDA basically has a stockpile of mortgage insurance that they've collected. So if somebody defaults on a loan, They can pay back the lender for that default. That's paid through two ways, two types of mortgage insurance.

There's an upfront mortgage insurance and monthly mortgage insurance. But it's 1% that they call the Guarantee Fee. It's added to your loan amount and it's financed into the loan. So if you're buying a home that's $300,000 is a purchase price. 1% of that is $3,000.

So your total loan is $303,000. So you don't have to pay the guarantee upfront, but it is financed into the loan.

You cannot waive escrows

When you're buying a home, your property taxes and homeowner's insurance are gonna be paid by the lender on your behalf in an escrow account for you. Most people actually really like that, but you can't waive it if you want if you don't want it.

Seller credits can help lower your closing costs

I'll cover the seller credits in detail. But this is a way where I've come to closing with buyers where they did 0% down and all of their closing costs were covered by the seller. So they truly brought no money to the closing table. And in some instances, I've had buyers actually receive money at the closing table for things like Tax Proration Credits.

Tax proration credit can help

Tax proration credit is just when part of the seller's tax bill that's coming due you get a credit back for that because taxes are usually paid in installments of six months.

So if, let's say the seller only, you know, had been in the home, one month of that tax bill, but you're going to get an upcoming tax bill you know, for that full six months, they're gonna give you one month of credit while they were in the property.

Wrap closing cost into the loan

One other really cool feature that no other loan has is you can wrap closing costs into the loan under one condition. This is, if the appraised value of the home comes in higher than the purchase price, you can include closing costs.

For instance, if you're buying a $300,000 home, Let's say it appraises at $305,000. You can have up to $5,000 in that difference there to cover your closing costs. That's only if the appraised value is higher than the purchase price.

Apply here!

Just one other quick reminder if you want to get more of these details, if you wanna see it, you know, on a prequalification worksheet, see your quote rate monthly payment and things like that. We'd love to help you. You can get a WintheHouseYouLove.com/apply. Our team is licensed in all 50 states.

Seller Credits

For Seller Credits, you can get up to 6% of the purchase price towards your closing costs from the seller. So for a $300,000 home, you can get up to $18,000 back towards your closing costs. Most people don't need that much, and it is important that seller credits can make your offer less attractive because this money is coming from the seller.

You're basically saying, Hey, Seller, could you take some of the profits that you're giving and give it. Some of those to me to pay down my closing costs, that can be really difficult to get in a really competitive market. But it is not uncommon for a lot of people to get seller credits. Most of the time it's way less than 6%.

Example: Purchase price: $350,000

So for \example, if we had a home that we were buying, and let's say this home is $350,000, our down payment is $0. Let's say our closing costs were $6,500. If we ask the seller for 1% seller credit, so 1% of the total purchase price that would be $3,500. So we take our 6,500 minus 3,500, and now our total due at closing would be $3,000.

So we could purchase a $350,000 home with a USDA loan with $3,000 out of our pocket. This is a very common scenario with USDA.

You could also ask hey, Seller, could you cover, you know, up, you know, 2%, could you just cover 2.75%? It's whatever you want in here that can help it make easier for you to purchase your home.

Sometimes you can do as well as you can actually raise the purchase price by the amount of seller credits the home stalls to appraise at that higher value. But it is something that you can do.

Proof of Funds

So when you are purchasing a home, you do have to prove where you got the money from. So for instance, if we're talking about it's gonna cost you $3,000 to buy this home, the lender has to prove where you got that money from. You can't just pull it out of the air and say, I have the money. Don't worry about it. It doesn't work like that.

Bank Statement & 401k

So, the way that we can verify these funds, we can verify them through two months of bank statements, 401K loans, or things like that.

You can accept gifts from anybody

Gifts are allowed from anybody that doesn't have an interest in the property. So you may be fortunate enough that a parent gives you a gift. You may have a sibling give you a gift for that money. That's perfectly fine. It just, there can be no expectation of repayments.

No unsecured loans are allowed

You can't get a personal loan. You can't pull out a credit card to pay for that money.

No cash on hand

Also, USDA is not going to allow cash on hand, and cash on hand literally means like, paper cash. It can't be mattress money. It can't just be cash that you had in a safe. It has to be seasoned in a bank account for two months so the lender can see what that source is. So if you have cash you'll want to put it into a bank account and let it season in there before you purchase a home with a USDA loan.

Lenders can question large deposits

Also what lenders are gonna look for are what are called large deposits. And these are any non earnings related deposits that they have the right to be able to question. So if they see a deposit in there and it doesn't come from payroll or for what, from whatever your work was then they might ask, Hey, where did this money come from? And maybe you sold your car and you made a profit on it. That's perfectly fine as long as they can back it up with receipts.

What lenders don't allow is just money that comes from an undisclosed source because they need to make sure it wasn't an unsecured loan or because of the Patriot Act, they also have to look for things like money laundering and different things like that.

Credit Score

So for your credit score, the minimum is a 500 credit score. Now, a lot of lenders have what are called Overlays, meaning that even though the minimum for USDA is 500, they might artificially have their own minimum, and that's okay. Different lenders can have their own rules that they want.

500 Credit Score, call our team!

Our team does do down to 500, and there are other lenders who do down to 500. However, there are a lot of lenders who don't. So just because the lender you're talking to says we don't do 500 credit score loans on USDA. That's fine. It doesn't mean that's the rule. The rule is 500.

640 is ideal

If you have a 640 FICO score and above, we can run it through GUS, the underwriting system for USDA, that's gonna give you better rates and make it easier for you to qualify for a USDA loan.

If you have less than a 640, we have to do what's called a Manual Underwrite, which is longer your process. It's gonna require more documentation. And it is harder to qualify if you have less than a 640. So it's important when we talk about minimums here, it doesn't guarantee that you have approval. You can't just say, well, I have a 501, so I should be able to get a USDA loan. It's not that simple.

These are just the minimums to qualify. You still have to be able to get approved through underwriting, which requires a lot more documentation.

Median Credit Score

Now, every person has three credit scores one from Equifax, Experian, and TransUnion. So what lenders will do is they're going to look at your median credit score. So for instance, if we're looking at somebody who has an Equifax score of 643, an experience score of 621, and a TransUnion score of 636, the median score here would be TransUnion, and we would use the 636 score to determine your rate and your eligibility. So this person would have to do manual underwriting in this situation.

So if you have less than a 640 credit score, it limits how much the maximum loan that you can get, and often requires reserves, meaning you need money left over in your bank account after you purchase a home, sometimes one to three months of the future mortgage payment.

Be careful of lenders who direct you to other programs

A lot of lenders just are not comfortable with USDA loans. They're unfamiliar with them. They don't know how they work, they don't know their requirements. This is really unfortunate because USDA is a fantastic program and just a lot of people don't know about 'em. So they'll direct you to something like an FHA loan, which has higher mortgage insurance than USDA.

No Credit Score, No Problem

If you don't have a credit score that also can work. We can use what are called alternative trade lines, things like your rental history and bill history for things like utilities to help you qualify for a loan.

Credit Events

Now, here are some of the rules for Credit Events. So if you had a deed in lieu, a foreclosure, or a short sale, then you're going to need to wait three years before you can get a USDA loan. If you had a Chapter 7 bankruptcy, you need to wait three years. If you had a Chapter 13 bankruptcy, you need to wait 12 months into an on-time payment program and you need court permission.

If you have IRS liens, you need three on-time payments on an IRS approved payment plan.

Interest Rates

Now for interest rates, if you wanna check what the current national average interest rates are, you can go to WintheHouseYouLove.com/rates. And I have those all listed on my website that update live.

Usually, these are lower than conventional interest rates and they're comparable to FHA interest rates. You can also increase the rate to get a credit. You know, we talked about seller credits and paying down those closing costs. What you can also do is maybe a lender offers you a six-and-a-half percent interest rate in the time this has been written.

What you can actually do is say, actually I want a 6.875% interest rate, and then I want to credit towards my closing costs. And sometimes that can help you lower your closing costs if you just need a little bit of extra wiggle room to help you knock down how much those are.

Mortgage Insurance

Now mortgage insurance is really the big sticking point of any government loan. So when we're talking about government loans, it's USDA, it's a VA, it's FHA, and mortgage insurance is what pays to keep these programs afloat. And there's often this misunderstanding or misconception that taxpayers are paying for all these people who get 0% down loans. It's not true at all.

The people who are paying for the 0% down loan are the people who are getting the 0% down loan. They're self-sufficient. All these programs are self-sufficient. So they're paid through mortgage insurance to cover the risk of these programs.

1% for USDA vs. other loan programs

So for USDA, there's a 1% upfront guarantee fee, which we talked about as finance into the loan. And there's also a 0.35% annual fee based on the total loan amount. Now, this is actually pretty low because FHA actually has a 1.75% upfront fee and an annual fee of 0.55. So it's lower than FHA. Conventional loans don't have upfront mortgage insurance fees. But if you're putting less than 20% down, often the mortgage insurance on a conventional loan is around 0.4 to 0.6% annually.

So this actually can be a really good alternative, particularly to FHA in this instance. What's interesting about the annual fee too is that it's collected monthly and is going to lower each year, but it's never going to fall off. So with conventional loans, the mortgage insurance falls off.

When you hit 22% equity, you can request it off at 20% equity. But on a USDA loan, it's going to be on there for the entire duration of the loan, but it will decrease every year as your loan balance decreases.

Check out this example

So for example, let's talk about a $300,000 home. the upfront fee would be $3,000. So our new loan balance would be $303,000. So you have a $303,000 loan. On a $300,000 home. Okay. For the monthly mortgage insurance, that annual fee here would break down to around $88 per month. So we take the total loan amount times 0.0035 and divide that by 12 to get us that monthly number.

Affordability

Now when we're looking at affordability what we're talking about is how much loan, the lender is going to give you. So, I know it can sometimes feel like Wizard of Oz when a lender is just hiding behind a curtain and they just randomly pull out a number and give it to you and say, this is what you qualify for. But it's really just a math formula where lenders determine the maximum loan you can get.

DTI for USDA

This formula is called a Debt-to-Income ratio, and it's based on your gross income, that's your pre-tax income. And all it is it's your debts, your minimum monthly debt payments divided by your gross income. So, minimum monthly debt payments are divided by your gross monthly income to give you that number.

You need to include your spouses' DTI

If you are in a community property state, one thing to be aware of is if you have a spouse who is not going to be purchasing the home with you, you still have to include their debts in the debt-to-income ratio, which can decrease your affordability.

Usually, if you have a spouse and you're buying a home, it's usually best to include them on the loan so we can use their income to offset their debt payments, but, If the spouse isn't purchasing, maybe because of their credit score then we do still have to include the monthly debt payments they have.

So community property states are things like places. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

No non-occupant co-borrower or co-signer

One other little weird caveat about USDA loans is you can't have a non-occupant co-borrower or what some people call a co-signer. So with other loans, like a conventional loan, you can add on maybe a parent to help you qualify for the loan easier. You cannot do that on USDA. Everybody who's on the loan has to live in the home.

Loan officers are not your Financial Guru

Now, when we talk about affordability, it's. Important to remember. Please keep this in mind. Your loan officer is not a financial advisor. Your loan officer's job is not to help you with your budget, is not to determine the best quality of life with your finances.

Their job is to help you understand what loan could you get approved for. You are the one who determines what's comfortable for you.

Rule of Thumb

Never take out a monthly payment. Never get a loan that is uncomfortable for you if you can't afford it. When you're just looking at the number and you're saying, this is too high. Don't go through with it. Don't purchase a home that you can't afford. There's no value in being house poor.

GUS

Now, GUS, the underwriting system for USDA requires a 640, and this ties into our affordability. How much loan can you get based on these debt-to-income ratios?

GUS is gonna do two things.

It's going to look at your debt-to-income ratio. It's also gonna look at all of these other different data points to see if you can get that thumbs up on the loan or thumbs down, and we have to either look at maybe a different type of loan or we need to do, you know, manual underwriting.

Front-end DTI

So there are two different debts of income ratios. There's a front end and a back end. The front end, it means your future mortgage payment is divided by your monthly gross income. So for USDA, it's a maximum of just under 34%. So what you could do is take your monthly gross income times .3399 to find what that would be.

Backend DTI

The back-end is your future mortgage payment plus your current monthly debt payments divided by your monthly gross income.

Underwriting Example

So for an example of a $90,000 household income, I feel like every once in a while I'll make and people are like, who makes $90,000?

I'm saying household. It could be one person making 90,000. It could be two people, one person making 60, one person making 30. It could be two people making 45. There are so many examples. This is not an unrealistic number here. So let's say in this instance you have a household with two people. They both make $45,000 per year.

So for our front end, what we would do is we take $90,000 divided by 12, find our monthly number times 0.3399, and that gives you a maximum mortgage payment of 25, you know, just above $2,500 per month. For the backend, we do the same thing, but we multiply at times 0.444599, giving us. $3,449. So from here, what we found is the maximum mortgage payment they could get would be $2,500. And then the maximum monthly debts they could have would be up to 900.  We just take this number minus the 2,500 number, which shows us how much monthly minimum debt payments they could have.

So in there, maybe you have a $400 per month card payment and a 200 per month, you know, $200 per month credit card. That fits under that number, and so you'd be able to qualify likely with GUS, depending on your credit score.

Note that GUS can't give you an approval

Now it's important to remember here, this does not guarantee approval. These are just the general guidelines here. These are the maximum qualification ranges. Just because you're under this doesn't mean GUS is guaranteed to give you approval. It depends on tons of different factors that USDA does not publish.

Max Purchase Price Calculator

Now, f you don't wanna do all of that math by hand because it can get confusing and overwhelming. I include all of this math, all the debt-to-income ratios in a calculator I call the Max Purchase Price Calculator. And so what you can see is you put in your information and it shows you an estimated maximum purchase price, an idea of what your payment could be, and a breakdown of that. Estimates of down payment and closing costs and tons of other things for an affordability dashboard. So you don't have to do all this math and you can actually explore your affordability in a more interesting way, in a more fun way that's not just us sitting down and doing math.

If you want that, you can get it at WintheHouseYouLove.com/maxprice.

Manual Underwriting

Now, if you aren't able to get a GUS loan, meaning you had less than a 640. Or if you had higher than a 640 and GUS said, thumbs down. And again, your lender is gonna tell you this. Your lender's gonna help you understand this.

Manual underwriting is gonna limit those ratios. So if you have less than a 680 FICO score, the ratio is maxed to 29% frontend, 41% backend. If you have a 680 plus, then the ratio is maxed to 32/44 with one of the following three months' reserves. You're with your current employer for two years or more, or the mortgage payment is the same or less than your current housing expense.

You know, for instance, maybe the new mortgage payment is a thousand dollars and your current rent is a thousand dollars. Then that works there.

Property Requirements

So for the property requirements, this is where USDA becomes a little bit more interesting than a lot of other loans because it is limited on where we can purchase that home.

USDA Map

So there is a USDA map. What you can do is begin to zoom in on where you're looking at buying and seeing what qualifies for USDA Eligible Area. In the search bar, you have to type in an exact USPS address. You can't just type in a city.

USDA Map Example: Tennessee

For example, let's just look at the general area of Tennessee. What we can do is see, everything in orange is an ineligible area, so everything outside of orange qualifies.

So look at all of these cities that qualify for USDA. Of course, Nashville is not gonna qualify. Way too populated of an area to qualify for a USDA loan.

USDA Map Example: Arizona

Let's look at another state. Let's say Arizona and see what's interesting. Obviously, Phoenix is not gonna qualify. All of these cities are around.

Some of these are reservations and that's probably not gonna be a great example. Let's zoom out into, oh, even over here, like of course, Orange does not qualify everything. Around absolutely qualifies for USDA. So most of the US qualifies for the USA compared to what doesn't qualify for USDA.

Must be a Primary Residence

Now, it does have to be a primary residence meaning you are going to live in the home. This is can't be an investment property. What you can do is you can sell at any time that you want. If you want to rent it out in the future, you need to live in the home for a minimum of one year. It says one car for one year to then rent it out without refinancing.

Can't be an income-producing land

There's zero income-producing land or buildings allowed as a primary purpose. If you have a Home Etsy store and you make soap perfectly fine if you wanna make a small little garden, and you sell it at a farmer's market. Perfectly fine. What you cannot do is the primary purpose of the home as an income-producing land or building.

You can't go have a big farm on it. But you can have a small little garden. You can't run a commercial soap factory with an outbuilding, but you can, you know, make custom little soaps at home. So that's perfectly fine. . There's no acreage maximum. The land must have a home on it. And it's important to remember. USDA is not a land loan and it's not a farm loan.

Get a REAL Estate Agent

Now just a quick break in here. If you are looking for a real estate agent, you wanna take the next step to start looking at homes and seeing what's in your budget range and what works and what do you need to start considering.

I work with Home and Money, which is one of the best referral networks in the US that can connect you with a helpful real estate agent. Local to you. So if you're interested in working with them, you can go to WintheHouseYouLove.com/agent and they'll match you with an agent who can help you through the next steps.

Appraisal Highlights

Now, when you do get a home, you're gonna need an appraisal. And an appraisal is what helps the lender make sure that what you paid for the home actually makes sense. They don't wanna give you way more money for the home if it's not worth it. So let's cover some highlights here with the appraisal.

Allows a closing cost wrap

Again, we talked about the closing cost wrap. If the appraisal value comes in higher than the purchase price, you can use that extra value to count towards your closing costs to pay those down for you.

USDA Loans: Prioritizing Health, Safety, and Property Value

USDA is concerned primarily with health and safety, structural soundness, and protecting property value. So think of a move and ready home. USDA is not gonna be great for a home that needs some work that needs some TLC usually is not gonna be super great for USDA.

Stricter than a conventional loan

It's gonna be stricter than a conventional loan because it's government insured and some really common issues that people are gonna run into with a USDA loan are gonna be things like broken glass, chipping paint, plumbing issues exposed wiring, a broken HVAC system rotting wood and a wet basement. These are all relatively easy fixes compared to some like really big foundational issues or structural issues that can be fixed, you know, relatively easy, but it can add some difficulty if you're looking at buying a home and maybe just has some like broken glass. Those are gonna be things that need to be fixed before you can close on the home with USDA. And those are things that hopefully your seller is going to fix. If you're looking at buying a home with USDA.

Example: Roseburg, OR

Now, some example properties, I just wanna help, you know, kind of ground this loan. So you can see, you can use this loan to purchase real homes that aren't just out in the middle of nowhere and falling down.

Some people think have these weird things about USDA loans. They think they're just like, you can probably buy some barn in the middle of nowhere. That's all falling apart. Not true. Let's look at this. $370,000 home in Roseburg, Oregon. The monthly payment on this would be just above $2,900 per month and estimating the cash to close around $7,400 to purchase this home out of pocket.

Now it's important. All these numbers are just based on averages, based on, you know, at the time of recording of this video it's not an offer to lend, you'll want an official quote from a loan officer to be able to get a better idea of what you can afford. Okay? So for the payment for this, the principal and interest payment would be around $2,400.

That mortgage insurance would be around $107 per month. The tax on this home was $200 per month. Homeowner's insurance would be around 137 and there was no homeowner's association fee. All of this together would be $2,900 for this $370,000 home. Of course, interest rates right now are hovering around high 6%.

So it's something to keep in mind if you're watching this video in the future. For the cash to close 0% down, as we've talked about several times in this video. Closing costs, I'm gonna estimate around $7,400. And on this, I'm assuming that maybe this was a competitive home, you know, competitive area.

A lot of people were wanting to buy this home. There were multiple offers, so we didn't ask for seller credits to make our offer more attractive. So we paid the closing costs out of pocket for $7,400.

Example: Franklin, KY

Another home. This one is $326,500 in Franklin, Kentucky. For a monthly payment, we'll be $2,567 per month, and it would cost us $3,265 out of pocket using these averages. So principal and interest payments would be around $2,157 per month. The mortgage insurance for USDA would be $94 per month property taxes, $196 per month. Homeowner's insurance is around $120 per month. And again, no homeowner's association fee on this. That would bring us to $2,567 per month to buy this $26,000 home.

So breaking down our cash to close we have a 0% down payment, which is $0. Closing costs, I'm estimating around $6,530. And I'm estimating here that we're gonna ask for a 1% seller credit. And so that would be $3,265. So if we take our closing costs minus our seller credit, that gives us the total due out-of-pocket of 3,265.

Commute

Now, just to talk a little bit more about the commute here. You can extend your commute if USDA isn't available near your job. And I wanted to go through two examples just to illustrate what this looks like. So first the average one-way commute for Americans is 27.6 minutes. That's what the average in the US is for someone driving to work is just shy of 30 minutes, so it's really not unrealistic.

I know I've talked about in previous videos about, you can get a USDA loan if you extend your commute. And of course, people always go to the worst-case scenario and they're like, I don't wanna drive two hours to go to work and live in the middle of nowhere. That's just not true. I'm gonna show you here some examples of very popular cities.

So let's say that you have a job. Your job's in Charlotte, and you could buy a home in Charlotte. Perfectly fine. Prices are probably gonna be pretty expensive, but you're like, Hey I can't afford the ho the prices in Charlotte. I also don't have a ton of money for a down payment. I'd like to keep my costs low. Maybe I'm relocating. So instead what you do is you look for USDA Eligible Area, and you look at Belmont, North Carolina. So to go from Belmont to Charlotte is gonna be 25 minutes. That's under the average commute time in the US. It's probably great enough time to listen to some good podcasts or audiobooks. In the income limit, which I'll talk about for the USDA loan.

In that area is $108,300 per year, and you're like, Hey, I'm under that limit. This is perfect for me. Okay, maybe you're buying a home in Austin, Texas. Same thing. I can't afford the prices in Austin. Maybe I don't wanna live downtown. I also wanna save as much money, so I wanna go with USDA. So instead, you look to live at something like Hornsby Bend, Texas. It's 27 minutes away, which is the average commute time in the US. The income limit there is $126,850. You're under it, you say, great, I'm gonna move there instead and start commuting to work a little bit further.

So commute is definitely a skill or something that you want to use with the USDA loan to expand your options cuz USDA is not gonna work in Charlotte, it's not gonna work in Austin, it's not gonna work in these bigger cities.

But if you just broaden your view a little bit more, you're gonna open up more access to some of these homes, and of course, you're not stuck there forever. Maybe you build equity and appreciation in that home to the point where in a few years you can sell it and make a profit and enough of a profit that maybe your income increase as well.

And you can use it to buy a home in the city that you want to. You can get closer to Austin. You can be in Austin, you can be in Charlotte. It uses a stepping-stone approach to buying a home. You don't have to buy your dream home as your first one.

Income and Employment

Now for income and employment, there is an income requirement for everyone in the household above 18. So what this means, and it's different than other loans, is that USDA is gonna look at everybody who's living in a house above 18. So keep in mind if you have kids living in your home who are above 18 and work, they're going to be included in the income requirement.

So everybody in the home needs to make it under the income limit combined. It's not for each individual person, it's everybody combined. So if I'm gonna go with a wild example the income limit here was $108,000. Well, if you make a hundred thousand dollars and your spouse makes a hundred thousand dollars, you can buy and make 200, you're above the income limit.

If you are the only one who works in, let's say you make $90,000 a year and you have a child in the home still, and they make, let's say $40,000 per year, that will put you over the income limit. So it's an income limit for the household, everybody above 18. Here's the link for the Income Eligibility tool.

So you'll wanna look at the county that you're buying in, how many individuals are in the household, and then that's going to give you the income limit for that area.

Income and Employment

Now, USDA wants you to have a stable income and employment. And it doesn't have to be at one job. What that looks like is it's a two-year history of work is mainly what they wanna see. Are you somebody who can hold a job and hold a state? You know, consistent or increasing employment is mainly what USDA is wanting to see. There's no minimum for a particular position, so you don't have to be at one job for two years. You just need to have a two-year history of having jobs.

Retirement is acceptable

So you can say like, Hey, I'm retired, and that's perfectly fine. It doesn't, you don't have to be employed necessarily. You do need a stable income though. So it could be a pension, social security, things like that.

Grossed up 25%

Speaking of that, non-taxable income can be what's called a grossed-up 25%. So let's say you make social security income of $2,000 per month. What we can use. Is 1.25% of that. So $2,500 in your debt-to-income ratio to help you qualify for more. And that's just because that income isn't taxed. And lenders use gross income in the debt-to-income ratio. Self-employment.

Is allowed, but you do have to have a minimum of being self-employed for two years. College also counts if you just graduated and you're getting you know, you're just starting your job. The lender's just gonna ask for college transcripts as proof of your two-year history.

Loan limits

There are no loan limits. The common misconception with USDA has zero loan limits at all with USDA instead, USDA has the income limit, so kind of buy that. There is almost this income limit of sorts that's limited by income. Because again, you know, you can't buy for an extreme example, if you make $50,000, you can't qualify for a $500,000 house.

So in that sense, it limits the amount that you can purchase based on the debt-to-income ratios that we talked about earlier. But there are no true loan limits. 

Student Loans

Now for student loans when we're looking at affordability and qualifying for a loan you can use income-driven repayment. So if your student loans are on an IDR program and underneath that, there are tons of different types of income-driven repayment programs those are completely allowed, and you can use that in your debt-to-income ratio. This is really helpful for qualifying for a loan.

So one thing to keep in mind though is that if your IDR payment is $0 per month, or the loan is deferred, then 0.5% of the balance has to be included in the debt-to-income ratio. It's a very strange rule. But for example, if we're looking at, let's say a $50,000 student loan balance and let's say that the Income-Driven Repayment program gives you $0 per month.

We can't use the $0 per month. We have to use $250 per month. That 0.5% of the balance in the debt-to-income ratio, can decrease the maximum mortgage that you can get. For some people that may not matter. For others that may cut into you know how much home they can qualify for.

On the other side, if your Income-Driven Repayment program is or payment is like, let's say it's a hundred dollars per month, we can use the $100 per month. It just can't be zero. Otherwise, we have to use the 0.5% of the balance. It's annoying and dumb. I totally get it.

Special Requirements

Some special requirement here is USDA has what's called a Conditional Commitment. And I'll have a link for where you can find the turn times for this in the description.

Conditional Requirements

This is how it works. It can be a little tricky. So when you qualify for a loan, you know you're going to talk with a lender, hopefully, you know you wanna work with us and our team of mortgage advisors in all 50 states, you can go to WintheHosueYouLove.com.

You'll fill out a mortgage application. Then you'll get a prequalification back with your quote. And it'll give you a prequalification letter where you can go start shopping for homes. Then you go find a home you love, you write a contract on it. Hopefully, the seller accepts now you're under contract. After that, your loan officer is going to submit everything to an underwriter for underwriter approval.

Once that happens, you might have other documents put in place. You know, the underwriters can ask for an appraisal, a title report. They may have some other documents that they request from you. After everything is finalized there, they're going to have to actually send your loan to USDA, and USDA is going to give back what's called a Conditional Commitment. And then your underwriter will be able to give you a clear to close.

Extra steps and extra days, you need to be patient

So there's basically this extra step where USDA just wants to do it, kind of a double check. They do a little bit of an audit of sorts, whereas most loans, they just close with the lender by themselves and they're perfectly fine.

And sometimes they're audited after the loan is closed. With USDA, every loan actually has this kind of extra audit that USDA does before it closes at the time of this recording, that's gonna take four extra days in the closing process. And this can change. there was a time about two years ago when that waiting period was around two weeks because of how crazy everything was.

There are also times when it's been like one day, so it really just changes depending on what. You know, the circumstances are in the market at that time. And again, I'll have the link for that, but it's so something to keep in mind. If you are gonna use a USDA loan, I would add an extra five to 10 days of padding to your contract.

So what I mean by that is if you're buying a home with a conventional loan, maybe you tell the seller, we're gonna close in 25 days, 30 days. If you're using USDA, I would lean more on the side of caution of saying to your realtor, Hey, maybe we write this contract for closer to 40 days. Just to make sure that if USDA, you know, USDA needs time to review it, but if they come back and say they need extra stuff, we need extra time to make that happen.

And we don't want USDA's conditional commitment review to cut into your contract and make things you know, put us outta contract.

USDA does have one-time close loans

Where basically they'll fund a construction loan. They're extremely hard to find at the moment. I don't have a lender that I know of that will do these well.

Rehab options

With USDA, same thing, they have rehab options but very difficult to find lenders that do this and do them.

Refinancing

Well now, when you get a loan in the future, you may refinance when interest rates lower. And USDA offers two interesting refinance programs. There's one called Streamlined and another called Streamlined Assist.

Streamlined Loan & Streamlined Assist

Primarily you're gonna use a streamlined loan. If, let's say your credit score increased quite a bit and you wanna take advantage of that higher credit score to get you a lower rate. That's when you'll be using streamlined. Otherwise, you likely use Streamlined Assist.

Basically, with streamlined assist, they don't have to do a credit check versus streamlined. They do have to do a credit check. So just something to keep in mind here.

No cash-out options

If you wanna cash out, you'll have to refinance to something like an FHA loan or a conventional loan, and you absolutely at any time can refinance to another loan. If you wanna refinance to a conventional loan. Because you know, maybe you have 20% equity and you wanna refinance the conventional to remove your mortgage insurance, you can absolutely do that. These are just options within USDA that you can do.

So you have tons of refinance options here.

Success Rate and Seller Perception

Now as far as the success rate and seller perception, like, is this a good loan that you want to get?

USDA is uncommon

A lot of sellers, a lot of people don't know about USDA, so it can be a little strange if a seller gets a USDA loan and that's why you wanna work with a good real estate agent who can help explain to the seller and possibly the seller's agent, what is a USDA loan?

It's not that crazy. We just need a little bit extra time for padding. You know, because of that conditional commitment, it's not the end of the world. It's extremely similar to an FHA loan. As far as the appraisal standards, as far as the process, it's really not that uncommon, you know, as a loan, but it is uncommon, unfortunately, to a lot of sellers. So you want your agent to be able to explain the details of that.

Slow because of that USDA Conditional Commitment

They can be perceived as slow again because of the USDA Conditional Commitment at the time of this recording. That's a four-day wait time. But it's really if you add on the extra time to your contract, it's a non-issue.

Appraisal can be a pain

Also, the appraisal, it's very similar to an FHA appraisal which for some people can be a pain. If the seller has a bunch of stuff, you know, chip paint, broken glass, exposed wiring, things like that then of course they're not gonna enjoy your USDA loan. But if the home is. Up to code in good working order then it's not gonna be an issue.

How do you get one?

Our team offers USDA loans in all 50 states. We would love to help you go through the process, answer questions that you have about it, and ultimately help you move into a home with a USDA loan or frankly, with any other loan. If you want to get Conventional, or FHA, VA, USDA, whatever you'd like. The process is really simple.

Start an application

Number one is you're just gonna start an application and you can start one at WintheHouseYouLove.com. There's a big button, you can't miss it to start an application there. This is gonna take you 15 minutes to go through. We're just gonna ask questions about your income and your, you know, your assets, what you're looking to do, how much you're looking to purchase.

See your decision-making numbers

Then what we'll do is show you your quotes. You'll get to see your decision-making numbers. Things like your monthly payment, and your closing costs down payment if you're doing a non-USDA loan. That way you can start to see what purchase price range works for you. What monthly payment is comfortable for you?

That way you can stick within it and move forward with finances that are comfortable so you're not house-poor in the future.

Shop for the home that you love

As you can begin shopping for homes that you love. And at that point, we hope that you're able to write an offer on a home and a seller accepts it, and then you'll be able to move into the home.

We'll help you through the process of going through underwriting. If you wanna learn more about another popular type of loan, another popular type of government loan, you wanna click on this video over here to see the FHA loan requirements for this year.

Ask us a question →
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Servbank, sb (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.

Servbank, sb 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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