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Income Requirements for a USDA Loan

Family sitting in front of homeUSDA Loans, often known as rural development home loans, are 30-year fixed-rate mortgages targeted at low-to moderate-income home purchasers. USDA home loans are guaranteed by the United States Department of Agriculture.

The USDA does not lend money to the home buyer directly, but rather offers default insurance to USDA-approved lenders that offer USDA home loans. Default insurance provides a significant incentive for lenders to lend money to eligible home purchasers who do not qualify for a conventional mortgage. USDA mortgage loans do not require a down payment and offer 100% financing.

USDA mortgages include income restrictions and the home must be situated in a specified rural area. Surprisingly, a USDA house loan is available in a wide variety of areas around the United States.   USDA Loan Calculator

The following information will help you determine whether you meet the USDA guidelines.

USDA Loan Requirements

  • Area Requirement - The home must be located in an eligible location
  • Co-signer and Co-borrower - Yes, but complicated
  • Credit Score Requirement - Usually 640 - lower with some lenders
  • Gift Funds - Down payment and closing costs to 100%
  • Income limits - 115% of median household income for county
  • Loan Limits - 1-unit home - No loan maximum
  • Minimum Down Payment - 0% No down payment requirement
  • Monthly Mortgage Insurance (MIP) - .35% required with all loans
  • Mortgage Programs - 30-year fixed-rate only
  • Occupancy Types - Owner occupied only
  • Seller Paid Closing Costs (seller assist) - Up to 6% of sales price
  • Upfront Mortgage Insurance - 1% of the loan amount

Does my area qualify for a USDA loan?

Homes must be located in a designated rural location. The USDA provides a lookup tool to determine whether the home meets USDA area guidelines.

Co-borrower and co-signer

A cosigner is permitted under the USDA home loan program. The cosigner(s) will not make up for the applicant's poor credit but will assist in improving the applicant's debt-to-income ratio.

Debt to income is a simple calculation that compares monthly debt payments to monthly income. For instance, if your monthly income totals $4,000 and your monthly debt payments total $1,000, the debt ratio is 25% ($1,000 divided by $4,000 is 25%).

The USDA prefers that applicants maintain a debt-to-income ratio of less than 41 percent for their monthly expenditures and new mortgage payments.

If the cosigner has moderate debt and a sufficient monthly income, the cosigner can help with the debt ratio. In brief, the income and debt of the cosigner are added to the borrower's income and debt. Hopefully, the combination of sources of income will result in a lower debt-to-income ratio, making the application more appealing to the lender. If you choose to add a parent or both parents as a co-signer, they must reside in the residence.

That is correct; co-signers are required to reside in the property. Borrowers who are not occupants are not permitted.

Credit score required for a USDA home loan

The minimum credit score for most lenders is 640, however some lenders may go below 640.

► Read more

According to the USDA underwriting guidelines, underwriters (that's the approval person), must perform a cautious level of underwriting.

Little or no credit history:

The lack of credit history on the credit report may be mitigated if the applicant can document a willingness to pay recurring debts through other acceptable means such as third party verifications or canceled checks. Due to impartiality issues, third-party verifications from relatives of household members are not permissible. Lenders can develop a Non-Traditional Credit Report for applicants who do not have a credit score in accordance with Paragraph 10.6 of this Chapter

Indicators of unacceptable credit

The following indicators require documentation meeting the criteria of Section 10.8 to approve an applicant's loan request for manually underwritten loans:

• Foreclosure within 3 years:
Including pre-foreclosure activity, such as a pre-foreclosure sale or short sale in the previous 3 years (refer to Attachment 10-B for additional guidance);

• Bankruptcy within 3 years:

• Chapter 7 bankruptcy discharged in the previous 3 years;

•  An elapsed period of less than 3 years, but not less than 12 months, may be acceptable if the applicant meets the criteria of Section 10.8 of this Chapter.

• Chapter 13 bankruptcy that has yet to complete repayment (repayment plan in progress) or has completed payment in the most recent 12 months.

• Plans that are completed for 12 months or greater do not require a credit exception in accordance with Section 10.8;

• Late mortgage payments, if any mortgage trade line during the most recent 12 months shows 1 or more late payments of greater than 30 days.

• Late rent payments paid 30 or more days late within the last 12 months.

Read more about USDA credit requirements in Chapter 10 including bankruptcy, foreclosure, and short sale acceptance

Gift money for down payment and closing costs

The USDA permits the use of gift money. The cash may be used to cover the down payment and closing fees.

A gift may be made by a family member, which includes the borrower's children, spouse, or other dependant, or by another person who is connected to the borrower by marriage, blood, adoption, or legal guardianship; or by a fiancée, fiancé, or domestic partner. The contributor of the gift may not be, nor may he or she have any relationship with, the developer, builder, real estate agent, or any other party to the transaction.

Loan limits

USDA loans do not have a maximum lending amount.

Income requirements for a USDA loan

The USDA loan program does enact income limits that are adjusted for family size. The base income across the United States are:

1-4 member household: $82,700
5-8 member household: $109,150

The USDA provides an easy to use income lookup tool.

Minimum down payment

No down payment is required provided the home appraises at the sales price. It should be noted that if the home appraises higher than the sales price, the difference between the sales price and appraised value can include the closing costs in the loan amount.

Monthly mortgage insurance (MIP)

USDA loan requires an annual mortgage fee. The fee is collected in monthly installments. Here's how the fee is calculated:
Loan amount X .35% = annual cost and then divided by 12, which equals the monthly cost.

Mortgage programs

30-year fixed-rate only

Occupancy types

One family owner occupied principal residences only

The monthly fee is .35% of the loan amount divided by 12 months. Another example: $101,000 X .35% = $353.50 (annual renewal cost). Divide the annual cost by 12 months and you arrive at the monthly premium of $29.46

Seller paid closing costs (seller assist)

The home seller is permitted to pay the buyer's closing and prepaid costs up to 6% of the sales price.

Upfront mortgage insurance

Like the FHA and VA loan programs, the USDA requires home purchasers to pay a guarantee fee. The guarantee fee funds the USDA's home lending program. The cost is negligible, amounting to less than 1% of the mortgage balance. The financing charge, sometimes referred to as the guarantee fee, is equivalent to 1% of the loan amount.

For instance, if you borrow $100,000, multiply $100,000 by 1% to get $1,000.
The guarantee fee may be paid in cash or financed at settlement.
The loan amount, if funded, would be $101,000.

Rotating question markFrequently Asked Questions About USDA Loans

Q. Are USDA loans fixed-rate?
A. The USDA only permits a 30-year fixed-rate.

Q. Are USDA loans good?
A. USDA home loans are a great way to purchase (or refinance) a home.

Q. Areas that qualifies for USDA loans
A. USDA must be located in an eligible area. Use the USDA lookup tool (see above)

Q. Can USDA loans be refinanced
A. USDA loans can be refinanced

Q. Disadvantages of USDA home loans
A. USDA requires monthly mortgage insurance regardless of the down payment. USDA home loans are only available in eligible areas and there are income limits with USDA mortgages.

Q. Do USDA loans have PMI?
A. Yes, however, the USDA uses the term MIP, for mortgage insurance premium

Q. How hard is it to get a USDA loan?
A. USDA loans are similar to conventional mortgages, with the exception of USDA income restrictions and geographical limitations.