USDA Loans

Yep, that's right, the same folks at United States Department of Agriculture who are grading beef also back home loans. 

As the name implies, there's even a government guarantee attached to the USDA loan. But having an agricultural occupation has nothing to do with your ability to cash in on the deal.

If your vision of home is more wide-open space and less urban townhome, a no down payment USDA loan might be a fit for you. 

What is a USDA home loan?

The United States Department of Agriculture (USDA) loan (also called the USDA Rural Housing Development Guaranteed Housing Program) is a government-issued 100% financing program designed to boost the economy and quality of life in rural areas.

By making affordable, low-interest home loans accessible to borrowers who might otherwise struggle with the down payment and credit requirements of conventional loan programs, families outside larger towns and cities can qualify for a loan and own their piece of the American dream.

How USDA loans work?

Just like other government-backed loans, USDA doesn't lend money directly to the borrower. Instead, they guarantee a portion of the loan will be satisfied, even if the borrower defaults.

USDA approved lenders use the program's guidelines to inform their underwriting process and determine if a loan meets the approval criteria.

What type of house can you buy with a USDA loan?

As you can imagine, a loan intended to improve life in rural and suburban areas is best suited for people trying to buy a home in those areas. It's not just the person who has to qualify for financing; the house's location matters and must be in an area considered rural.

It might surprise you to learn there are plenty of homes in California without a pasture and barn that qualify for a USDA loan. The USDA has an eligibility page on their website you can use to determine if a property sits within an eligible area.

The vast majority of California that sits outside city limits (even if it's just outside) qualifies as a USDA eligible area.

Benefits of a USDA loan

• No down payment required
• Low mortgage insurance premiums
• Typically lower interest rates than conventional loans
• Flexible credit requirements
• Did we say no down payment and great rates?

Requirements to qualify for a USDA loan

Once you determine your area has homes that qualify for a USDA loan, you'll want to know whether you can qualify based on your credit history and income.

Here are some of the requirements of the USDA loan program.

Income maximums

Because this is a government-backed program designed to promote homeownership in rural areas, there are income limits to ensure people don't take advantage of the program. 

Income limits vary dramatically by area and family size. You can see a list of income limits for USDA loans in your area here.

Income maximums are related to the entire income of the household, not just the individuals applying for the loan.

Debt-to-income ratio

To qualify for a USDA loan, your total debt-to-income ratio must be no more than 41%. That is to say your debt must not equal more than 41% of your monthly income. With a healthy credit score or other compensating factors, the USDA does make exceptions up to 44% but not any higher.

Adequate monthly income

Your proposed payment, with taxes and insurance, can't be more than 29% of your monthly income. 

For example: 

If your monthly household income is $4,000, the proposed mortgage payment, including taxes and insurance, would need to be no more than $1,160 per month to remain under the 29% threshold.

As with the debt to income ratio, the housing ratio can, with strong credit or other compensating factors, be increased to 32%. 

Employment history

Income must be verified and have at least 2 years of history in the same industry or at the same job. Some exceptions can be made for gaps in employment due to maternity leave, continuing education in your field, or medical reasons.

Credit score - 620 to 640 minimum

Credit scores must be a minimum of 640. Applicants with a median credit score between 620 and 639 may still qualify, but will not receive streamlined processing, and will likely see more paperwork and stricter underwriting standards.

Credit history

USDA underwriters are looking for good credit history with no collections accounts sent to collections in the last year. However, if there were extenuating circumstances, exceptions can be made. Also, a lack of credit history can be overcome using non-traditional reporting methods, such as rent payment history and utility bills.

Housing situation

USDA home loans are not available to people who already own a home within commuting distance (defined as a massively large area) of their desired purchase area. For example, you can't own a home in Sacramento and use a USDA loan to buy in Colfax.

How to apply for a USDA loan

Your mortgage advisor is a great place to start if you think a USDA loan might be a good fit for you. Once you determine the property is located within the designated area and you meet the general requirements, you can submit an application and be one step closer to owning a little piece of the countryside.