USDA Loan Requirements 2020
USDA loans offer many incentives to home buyers, include 100% financing (no down payment is required), low rates, and other advantages. There are some restrictions, however, which are based upon borrower eligibility (credit and income), and property eligibility (location and condition). You can learn more about these specific requirements below. If you are unsure about any requirements, a loan specialist can assist you by answering all of your questions.
USDA Loan Credit Requirements
There are some mandatory requirements that must be satisfied for a USDA loan. This includes minimum credit scores, and other aspects of credit history.
- Credit Score – A minimum credit score of 640 is required for an automated approval. However, borrowers with lower credit scores (within the 580-639 range) may still get approved, but it will require having sufficient “compensating factors“. This could be money in savings, extra income (in addition to your primary job), conservative use of credit, and/or low debt-to-income ratios. If your credit is below 640, do not let this discourage you from pursuing a USDA loan, since you still may get approved.
- Trade-lines – USDA loans require that you have 3 trade-lines. Some great news, is if you lack official trade-lines on your credit report (such as credit cards or auto loans), you may be able to qualify using non-traditional sources, such as water, cell phone, electric, or other monthly bills you show timely payment history on.
- Tax Liens – Your credit report must be cleared of any tax liens. You can not owe the IRS or have any other federal debts.
- Foreclosures – The USDA rules for foreclosures is that you must wait at least 3 years after the date of the foreclosure.
- Bankruptcies – The requirements for chapter 7 bankruptcy (in which a court discharged most or all of your debt) is to wait at least 3 years before you are eligible for a USDA loan. The rules for a chapter 13 (where you were placed on a payment plan), are that as long as you show 12 months of on time payments you may be eligible for a USDA rural development loan.
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USDA Loan Income Requirements
USDA loans have two different types of requirements related to income. The first is that you can not make too much money and be eligible for USDA loans. There are strict income limits for how much money you can make. The second set of rules related to your debt-to-income ratios.
- Income Limits – The income limits are based on your location and the number of people that live in your household. The exact limits are set at the county level. For most counties, the limits are $82,700 for 1-4 members and $109,150 for 5-8 members. There are several potential income adjustments you may be eligible for. If you have any full-time students or disabled persons living in your home, you may reduce your qualifying income by $480. If you want help understanding how to calculate income, or to see if you qualify, request a free consultation.
- Debt Ratios – There are two types of debt ratios. The first is the “front ratio” which is the percentage of your monthly income that your desired mortgage payment will be. USDA loans allow a maximum ratio of 29%. The second ratio is the “back ratio”, which is your mortgage payment combined with all other monthly debt obligations that show on your credit report, such as credit cards and auto loans. The maximum number allowed with USDA mortgages is 43%. You may be able to qualify for higher ratios if you have “compensating factors”, such as great credit or savings.
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USDA Loan Property Requirements
- Eligible Areas – The USDA strictly outlines areas (or “zones”) where USDA loans are ineligible. These areas are only in cities and large towns. Generally, any town with 20,000 people or less is eligible for a USDA loan. However, areas just outside of cities and towns are eligible. In some places, you are not much more than a 20 or 30 minute drive from larger urban areas. To view eligible zoning, use the USDA website.
- Types of Properties – USDA loans are available for normal residential housing, and not any income-producing properties. You may not purchase a farm, or any type of investment property. USDA loans are exclusively available for 1 unit homes, such as single family residences, or 1 out of 2 units in a duplex.
- Property Condition – A home must provide livable conditions and meet certain quality standards. This includes being what an inspection would consider “safe, sound, and secure”.
- Facilities – Homes must provide adequate facilities, such as hot water, sanitation, plumbing, and safe access to other necessary facilities necessary to health.
There are other property requirements for USDA loans, which you may be interested in learning about. If you would like our assistance finding eligible USDA homes for sale, or to receive a quote and get pre-approved, request a free consultation.
Frequently Asked Questions
Do you have to be a first time home buyer?
You do not have to be a first time home buyer, but you may only have one USDA loan at a time. Also, they are only available for owner occupied (primary residences), so if you are a current homeowner, you may not get a USDA loan until your current home has been sold. If you have owned in the past, but do not currently own, you may finance a home purchase with a USDA loan if you qualify.
Is it acceptable to use a cosigner for USDA loans?
USDA loans allow cosigners. The cosigner does not have to be a relative, but they do have to also occupy the home (live there).
I switched jobs recently, could this disqualify me?
The USDA loan programs allow job changes. As long as your income is consistent, and you do not change jobs frequently in different lines of work or industry, a job change should not disqualify you.
Are USDA loans available to finance an investment property?
USDA home loans are only available for owner occupied properties. Investment properties are NOT allowed.
Can you finance a multi-unit property with a USDA loan?
USDA home loans are only available for 1 unit homes (or half of a duplex). You may not purchase a multi-unit property with a USDA loan.
Can you purchase a farm or agricultural property?
USDA loans are not available for any income-producing property, so farms are not allowed. In spite of the USDA being the Department of Agriculture, the USDA guaranteed loan and USDA direct loan programs do not finance farms.