Despite the fact the United States Department of Agriculture or USDA home loan program makes it possible to fulfill the homeownership dream of prospective home buyers, it has certain requirements that they should meet. These requirements vary from the location to the property type and have been designed to ensure that only people who meet these criteria, obtain a loan from the USDA. In this blog post, we’ll discuss five such prerequisites that applicants should meet to qualify for the USDA program.
1. Debt to Income Ratio (DTI)
After the amendments made in the USDA’s policy on December 1, 2014, if you are applying for a USDA home loan, you are required to maintain a debt-to-income ratio that should not exceed 29 percent. Your debts, including credit card, total house payment, and other loans, shouldn’t exceed 41 percent of your gross monthly income. Borrowers, however, with a good credit score (usually 680+) and some reserves in the bank, or who have debt-to-income ratio not exceeding 29 percent can take the assistance of USDA’s Automated Approval System, GUS, to get their loan approved.
2. Funding Fee
Though USDA borrowers are not required to pay any Private Mortgage Insurance or PMI, they need to pay an upfront funding fee that varies between 2 and 2.75 percent of the total loan amount. The funding fee, like PMI, helps lenders cover costs in case borrowers default on the loan. This fee, however, is considerably less than the usual PMI fee.
3. Minimum Credit Score Requirement
Until the recent update in December 2014, credit score was not a qualifying criteria for borrowers of USDA home loans, be it Texas, or any other state in the US. In the current situation, however, applicants require to maintain a minimum credit score between 620 and 640 if they apply for a loan through GUS. In case you aren’t taking the help of the USDA’s automated loan approval system, you should have a credit score of more than 641.
4. Income Limitation
When talking about the income requirements, the USDA has certain income levels for different states, which applicants shouldn’t exceed in order to qualify for a loan. Your total household income should be equal or below the income limit set by your USDA-designated area. In addition, borrowers should have assets less than what are required to apply for other home financing programs.
5. Property Requirements
USDA provides homes loan for properties that borrowers intend to use as the primary residence. The loan isn’t meant for any investment property. In addition, the property you are looking to purchase should fall under the area that the Rural Department has listed as “rural” in their instruction document.
Word of Advice
The USDA home loans, whether in Texas or any other state, provides significant benefits over conventional loans. Some of the key benefits are the option of no-down payment and the flexibility to finance 100 percent of home including the closing costs. It has, however, certain stringent requirements that applicants must meet to qualify for a loan. Consulting a mortgage expert can help you learn more about these prerequisites as well as help streamline the entire mortgage financing process. Besides, a loan officer can also suggest if there’s any other loan program that better suits your needs.