What are the USDA Loan Requirements?

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USDA loans in Colorado are only for borrowers that meet the eligibility requirements and the qualifying requirements. They aren’t one in the same.

If you aren’t eligible for the program, you’ll have to look elsewhere. If you are eligible, you must also qualify. Don't worry, though, the qualifying requirements are very flexible.

The nice thing about USDA loans is the lack of a need for a down payment. You can borrow 100 percent of the purchase price as long as it appraises for at least that much. The only assets you’d have to verify is any money you use to cover the closing costs. USDA loans have the most affordable closing costs, which is another great benefit.

USDA Eligibility Requirements

First, let’s discuss the eligibility requirements. These are the requirements you must meet to apply for the program. The USDA loan isn’t for everyone – it's only for households that don’t qualify for any other type of financing and meet the income and property guidelines below.

The USDA’s income and property eligibility requirements vary by county, but we’ll discuss generalities here.

On average, 1-4 member households’ income must be $90,300 or less and 5-8 member households’ income must be $119,200 or less. Specifically, each county has a limit based on the area’s median income. Your household income may not exceed 115% of the area’s median income.

In addition to the income eligibility, the property must meet USDA eligibility guidelines. Ideally, the program is to help homebuyers purchase a home in a rural area of Colorado. You may find some outliers on the map that fall into suburban areas, but no metropolitan areas are eligible.

USDA Qualifying Requirements

If you are eligible based on the USDA guidelines, you must then qualify for the loan. While the USDA uses household income to determine your eligibility, they only use the borrower and co-borrower's income for qualifying purposes.

Here’s an overview of what the USDA requires:

• You must be a US citizen
• You must meet the credit score requirements
• You must have reliable and consistent income with at least a 2-year history
• You shouldn’t have any late payments or collections in the last 12 months
• You must live in the property as your primary residence
• If you had a Chapter 7 bankruptcy, it must be at least 3 years since its discharge
• If you had a Chapter 13 bankruptcy, it must be at least 1 year since its discharge

USDA Credit Score Requirements

For a loan with 100 percent financing, the USDA credit score requirements are rather flexible. Borrowers need just a 640 credit score. If you have a co-borrower, the borrower with the lowest credit scores should have at least a 640 to qualify.

If you have a credit score lower than 640, you may still be eligible, but for manual underwriting. Lenders will take a closer look at your credit history, usage, and payments to make a final determination as it’s on a case-by-case basis. They look at the big picture – determining your risk level by looking at how the pieces fit together rather than focusing just on your credit score.

USDA Repayment Income

Your USDA repayment income is different from your eligibility income. This is the income brought in by only the applicant and co-applicant.

The USDA-approved lender uses your total income to determine your debt-to-income ratio. This demonstrates your ability to repay the loan. Overall, your debt ratio shouldn’t exceed 41 percent. This means your total debts shouldn’t exceed 41 percent of your income before taxes. Your debts include:

• The potential new mortgage payment
• Car loans
• Student loans
• Minimum credit card payments
• Installment loan payments

Your lender may look at your housing ratio too or the comparison of your total housing payment to your gross monthly income. On average, they prefer if it’s 31 percent or less.

USDA Property Requirements

Even if you find a home in a USDA-approved area, it must pass the USDA appraisal. The goal of the program is to help you afford a decent, safe, and sanitary home. Almost all home types are eligible including new construction, single family homes, condos, townhomes, and manufactured homes.

In addition, the home must have year-round street access, proper water and wastewater disposal, and working utilities throughout the home. The home must also not be used for income-producing purposes. If the home has a barn or other barn-related facilities that aren’t used for commercial purposes, it may be eligible.

USDA Mortgage Insurance

USDA loans include mortgage insurance. This is how they can provide 100 percent financing on loans, which means you don’t need a down payment.

The USDA charges two types of mortgage insurance:

• Upfront mortgage insurance – You pay this fee at the closing (or wrap it into your loan). The USDA charges 1.0 percent of the lao amount. This is a one-time fee. For example, if you borrow $150,000 you’d pay $1,500.
• Annual mortgage insurance – The USDA also charges a 0.35 percent annual fee, which they charge monthly. The amount decreases as your principal balance goes down. On a $150,000 loan, you’d pay $525 a year or $43 per month.

USDA loans make buying a home much more affordable for low to moderate income families. If you struggle to find a loan program and will buy a home in a rural area according to the USDA guidelines, it could be a good fit for you.

I have many years of experience working with families and the USDA program. I can help you determine if it’s your best option, if you’re eligible, and how to make the most of the program. I’d be happy to walk you through your options and help you choose the right loan program. Call or email me today for more information.

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