USDA Loan Requirements (2020) For 0% Down!

Certified Mortgage Advisor
NMLS 1701021
Published 
February 2, 2020

USDA Loan Requirements

Today, we're talking about USDA loan requirements. USDA loans are kind of strange loans, but they are like a hidden 0% down program that a lot of people don't realize that they can qualify for.

One of the biggest loan programs

So USDA loans are one of the bigger loan programs in one of the main categories of different loans.

Four main loan programs

We have Conventional loans, FHA loans, VA loans, USDA loans. Those are the main four categories of loans. And a lot of people look over USDA loans. So we're going to cover all of the ins and outs of qualifying for them.

Benefits of USDA

USDA loans are kind of weird. They offer a lot of benefits. They have some weird quirks, but sometimes you have to have this weird box that you fit in with USDA loans.

So it's good to know what it's like to get that 0% down and to get a great rate. One of the benefits of USDA loans is probably two main benefits that people enjoy about USDA loans is #1 it's 0% down. It's one of the only 0% down programs that's available to non-veterans and USDA rates are fantastic.

USDA is government insured

Since USDA is insured by the government, like FHA loans, and like VA loans, you get really great rates on USDA loans compared to a conventional loan.

What does USDA program do?

So in a nutshell, this is what USDA says their program does. It says this program assists, approved lenders in providing low and moderate-income households the opportunity to own adequate, modest, decent, safe, and sanitary dwellings as their primary residence in eligible rural areas. Eligible applicants may build rehabilitate, improve or relocate a dwelling in an eligible rural area. The program provides a 90% loan guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural homebuyers. So in short, the USDA loan is a great option in rural areas.

Property Requirements

So we're going to break this down into some categories, so it's easy to track along here, but the first requirement let's talk about property requirements for USDA loans. Each loan type has its own requirements for what the property is going to look like.

Should be a rural property

So with USDA, they want it to be a rural property. Now you might be thinking instantly, that you don't live in a rural area. There are actually a lot more properties than you think. If you stick around to the end, I'm going to show you the USDA map and how you can navigate that to figure out if you have a USDA eligible area around you, because if you really need 0% down, You might be able to just extend your commute by five to 10 minutes and be in a USDA eligible area.

Good condition

Also, USDA wants these properties to be in good condition, they don't like rehab. You might be able to find a way to do a rehab loan with USDA, but they're just complicated, they're not a lot of programs out there to do USDA like that.

So you might run into issues there. I would suggest using something closer to an FHA 203K to do rehab with. Most of the time, you're going to want to find a property that's in solid condition, unless you're exclusively using, a rehab loan.

Primary residence

Also, the property needs to be a primary residence. USDA is not going to allow investment properties. You need to live in the home. So something big to keep in mind, eventually you could live in it for a while and then maybe use it as an investment property later, but it needs to be a primary residence when you purchase. Something that's very strange about USDA loans is that you would think with being USDA and in a rural area, that they would allow you to have a farm or they would allow the financing of a farm, but they don't.

Don't allow income producing buildings or land

USDA does have farm loan programs, but farm loans are separate from USDA loans. A USDA loan, right, we're talking about a primary residence, a USDA loan does not allow any income-producing buildings or land to be financed. So if there are outbuildings like there's barns or silos, if those are being used for commercial income-producing purposes, they cannot be financed on that loan, meaning that you can't finance a property if it has an active working farm on it.

You cannot just simply do it with a USDA loan. It's super strange, but if you need to purchase a property and finance it, and it has a working farm on it, or it has income-producing buildings or land, then you need a farm loan, not a USDA residential loan.

Employment

When it comes to income, just like every other loan, you need stable income and employment. What that looks like is you need to have a history of employment over the past two years, school counts as employment. If you have any time off, what you're going to have to do is write an explanation to an underwriter. Normally for USDA, if you have a gap of 30 days of unemployment, that's where you need to write a letter of explanation and your loan officer can guide you through what that looks like and how to navigate that.

Normally it's fine. What they're looking for is they just want to see, are you somebody who can consistently hold a job? It just needs to look cohesive in there. So if you took time off and you were a stay-at-home mom or stay-at-home dad, or you had an idea injury, something happened it's something that you're going to explain if you have a job gap.

Stable income

An underwriter doesn't want to see income that's declining. They want to see income that's stable or increasing. If you have fluctuating wages, the underwriter's going to have to take a closer look at your loan to make sure that everything looks consistent moving forward, that they know that in the future, you'll be able to pay back that loan.

Income limits

USDA is interesting in that they have income limits, whereas conventional loans and FHA loans, and VA loans don't have income limits USDA does. So income limits vary by county, and I'll show you a tool that we use that you'll be able to quickly figure out if you qualify for a USDA loan, based on the property and income at the end of this video with two quick and easy, tools. But there are income limits. Not everybody qualifies. It depends on your home size. Something that you have to keep in mind too, is USDA is not just interested in the income of the people on the loan, but they're interested in the income of your household.

They calculate all the income

So people 18 and older, want to calculate the income of everybody in that home. So for instance, if you buy yourself a make under the USDA income limit and you're on the loan, but your spouse and you together make more than the income limit, you will not qualify for that loan, even though your spouse isn't on the loan. They look at household income for the income limit, not loan income for the income limit. So that's a weird quirk that can kind of trip up things. Or for instance, if you have, if you're living with maybe your parents are elderly and they live with you, you're going to have to calculate any income that they receive from pension, retirement, social security, or working. That's going to have to calculate into the income limit, even if they're not on the loan.

0% down

So some features of the USDA loan, the biggest one, 0% down. My one word of caution. I wish that with 0% down programs and down payment assistance programs, there was a requirement for some form of education or counseling to be involved with 0% down because 0% down sounds great, but it very easily can be dangerous depending on what your future plans are.

You can get trapped in a property

With 0% down. I think they could be great programs, but my word of caution would be 0% down can keep you trapped in a property because you don't have equity. Right? Let's say that the property value is here right now. And you got a loan for that exact amount, meaning you put 0% down. Well, if all of a sudden the housing market changes and prices drop, you're now immediately underwater on your mortgage.

Now, if you're going to be in that property for a while, that's okay. Because housing prices are going to fluctuate, and while that's going on your loan balance is decreasing, and you still have values fluctuating. Eventually, you'll have equity in that property, but if you're looking at moving in a short time frame, you might be trapped in that property. Or when you sell, you might have to bring money to the closing table. So something you need to be cautious of and aware of when you do 0% down.

Low mortgage insurance

USDA also has really low mortgage insurance, which is awesome. Since you're putting 0% down, you're going to have mortgage insurance. You can't remove mortgage insurance unless you're on a conventional loan that's 20% down or an FHA loan that has 10% down. And even then it takes 11 years to come off. But mortgage insurance is pretty much going to be seen on any loan with less than 20% down.

So USDA does 0.35% of the loan balance as their mortgage insurance payment, compared to FHA loans are 0.85%. So you can see that drastic difference. FHA has mortgage insurance of 0.85%, and USDA has 0.35%. So you have a lot of savings with USDA loans, as far as mortgage insurance.

USDA Funding Fee

USDA also has a funding fee that's wrapped into the loan amount. So if you have a loan for $200,000, or the property value is $200,000 and you take out 0% down as a loan, your actual loan amount is going to be $202,000. $2,000, or 1% of the loan, is added into the loan amount. That's the funding fee that USDA charges to be able to provide these loans.

You have 1% on USDA compared to 1.75% on FHA. So USDA, as far as government programs go, is one of the better options. I think if we're ranking government loans, VA loans are the best, but they're only available to veterans, USDA loans are second best, and then FHA loans are third best. The problem is VA loans require you to be a veteran, USDA loans require you to be in a rural area and the income limits and FHA loans are the most open and accessible.

Slow USDA application

Another weird quirk with USDA loans is, you have to go through the underwriting process, like any other loan, but then at the very end, you have to submit that loan and not you, but your lender will submit that loan to USDA.

Then USDA has to do a final approval, an audit of that loan. And turn times take anywhere from one day to maybe a week. And USDA gives you no insight to how long your loan is going to sit in there or any progress updates. So what will happen is you'll go through the regular loan process where you're doing an inspections, appraisal, underwriting, closing, everything like that. Once you're finished and you're clear to close that loan gets submitted to the USDA.

The USDA then is going to take that loan they're going to audit it and make sure everything looks good and either give you an approval or a rejection. So, as long as the lender's doing everything correct, you're going to get approval.

I've never had a rejection from USDA, but the thing that's a bummer is USDA can kind of take however much time they want. And they're a government program. It can just take a long time and they do not give you any status updates. They don't give you any progress updates. You can't call and check in on a file. You just have to wait and hope for the best. That's the only downside of going through that, the USDA process.

Appraisal cost wrap

One weird quirk of USDA that a lot of people don't know about is you can wrap closing costs into the appraised value of the property. So let's run through an example. Let's say you have a property for $200,000 that you purchase, and let's say it appraises for $210,000. Well, you can actually wrap in your closing costs up to the appraised value.

With normal loans, you can't do that. You have to go buy the lesser of the purchase price or the appraised value. With USDA, you can use the appraised value. So if we have a $200,000 price, okay, let's say that our loan is $202,000 because of the funding fee. And we appraised at $210,000, we now have $8,000 leftover that we can finance. So, if you have any closing costs around $8,000 or less, you can finance that into the loan. Just increase the loan balance to cover any of those closing costs, which is always a nice benefit, but your property does have to appraise above the purchase price.

USDA Loan Requirements

Now let's jump over to some quirks with qualifying on USDA loans. So one thing to note, is anyone who's a qualified buyer can get this loan.

This is not just for first time home buyers

It's not just for first-time home buyers, you can get it if you're a first-time homebuyer or a seasoned buyer. It can be your second, third, fourth home that you're moving to. So not just first-time home buyers.

Sometimes USDA requires reserves

Reserves are basically the lender, making sure that after you close on the loan, your bank account, isn't wiped out. They want to make sure that you still have money left over after you close on a property. So with reserves, it normally looks like one to two months of reserves.

What are reserves?

And all that means is if your housing payment is $1,000 per month, two months of reserves means that you need to have $2,000 in the bank after you close on your loan. So $2,000 is left in the bank after your closing costs. So if you're bringing $1,000 to closing, you need to have $3,000 at closing, meaning $1,000 for closing costs and an additional $2,000 for reserves. And reserves are just the money that you have, it still stay in your account. You don't pay it to anybody, but again, the lender is just making sure that when you close on your loan, you still have money left over.

Credit score

As far as credit score, a 640 credit score is going to be the best for you. You're going to get better rates and it's going to be easier to qualify with a USDA loan.

It does go down to 580 and in some instances, you can go down to 550. You need to have a lot of other compensating factors, meaning that if you have a 550 score, you probably need to have a lot of assets, you need to have a good income and debt-to-income ratio. If you do have a 550 score, I don't see that happening most of the time. You can go down to 580, but 640 should be what you're shooting for if you're going to qualify for a USDA loan.

3 years waiting after public filings

Also, you're going to need to wait three years after a bankruptcy, a foreclosure, or a short sale. So if you had any of those events happen, you need to wait until those are discharged or finalized and then wait three years before you can get your USDA loan.

29%-41% DTI

USDA is one of the tightest loans in their debt-to-income restrictions. So they have a 29% front-end ratio and a 41% back-end ratio. So 29%, I wouldn't focus on that too much. Your mortgage advisor can help you with that, but 41%.

What this means is if you take your gross income times 0.41, then that's the max amount of debt you can have. So you're going to count debt like auto loans, credit cards, student loans, any other type of credit you have, plus your estimated housing payment that together can not exceed 41% of your gross income.

So, this is pretty tight as a restriction. USDA will actually go all the way up to 46% in some circumstances, but we're mainly going to need to focus on 41% for most people that's the debt to income limit is 41%. And that's pretty low compared to conventional which will let us go up to 49%. FHA will allow us to go up to sometimes 56%.

So, USDA loans can sometimes be hard to qualify for to make sure we hit all these boxes, right? Because we have income limits and debt to income limits and property limits. And it's, it gets a little confusing and there is sometimes this really narrow box that we're trying to get in with USDA loans.

Closing max is 6%

Closing cost credit is 6% of the purchase price as a maximum.

How to get the max credit

So, USDA loans can sometimes be hard to qualify for to make sure we hit all these boxes, right? Because we have income limits and debt to income limits and property limits. And it's, it gets a little confusing and there is sometimes this really narrow box that we're trying to get in with USDA loans.

Map and calculator

Finally, I'm going to run through a map and a calculator. That's going to help you see what properties are eligible along with if your income is eligible for USDA loans.

USDA website

Here's the link: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp. That's going to take you to USDA's page that's going to help us see what properties qualify for USDA and the income eligibility.

Walkthrough

So, first, we want to make sure we're on the Property Eligibility tab. We can now type in an address up here to see if it qualifies for USDA, or we can search in this map by zooming into different locations, and if ever you see location in orange, that means it's ineligible.

Moving to the suburb cities and qualify

So it's nice about USDA areas is that, so I could live in one of the main cities and not qualify for USDA, but if I extended my commute to just outside of the main cities, all of a sudden I could purchase. I could extend my commute and now qualify with a USDA loan.

Or what often happens for people in our area which is Dayton, OH is maybe they work here in Troy. They could good move to Tip or Caste Town or Pleasant Hill, they could live in Ludlow falls or West Mountain, any of the surrounding areas and qualify for USDA, extend their commute and then work in Troy.

Income eligibility

What we'll do is we'll first pick a state. This is going to help us see the maximum income limit with USDA. So I could choose a County. Choose the number of people in the household, and USDA wants to know this to see because the income limit increases with how many people are in your household.

So for example, I'm going to put four people in my household that I need to put a number of residents under 18 years old, disabled, or full-time students let's put two. Also, answer the following: As a loan applicant, or co-applicant age 62 or older, Any disabled persons living in the household, will put no as well. Then we can hit next.

USDA doesn't want to look at childcare expenses. So maybe I don't have any childcare expenses. Then they want to know monthly income. So let's say base employment income is 5,000. And let's say for the other household member, let's say 5,000 as well. And now I can see the applicant is ineligible.

How to find out why we can be ineligible

So we can take a look and see why are we ineligible. Well, the annual household income is $120,000. But our total, the deduction is $900 for childcare expenses. The adjusted income is $119,040. So we can see that childcare expenses are reduced from that limit. So if you have childcare expenses that do help you qualify but I can see that the limit, here was actually 86,850. So in this instance, we would make too much money to qualify for the USDA income limit here on their program.

So you can compare USDA versus FHA. What's a better option for you. And if you don't qualify, USDA, maybe FHA is a good option. So click over here to check out FHA loan requirements.

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