USDA Loan Requirements

What are the USDA Mortgage Loan Requirements?



To decide if you qualify for an USDA Mortgage Loan, the following will be looked at:

• Your income and your monthly expenses. Standard debt-to-income ratios are 29/41 for USDA Loans. These ratios may be exceeded with compensation factors.
• Your credit history (this is important, but USDA's credit standards are flexible). A FICO score of 620 or above is required for all loans through most lenders.
• Your overall pattern rather than to individual problems you may have had.

To be eligible for an USDA Mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (29% ratio). 
Your credit background will be fairly considered. At least a 620 FICO credit score is required to obtain an USDA approval through most lenders. You must also have enough income to pay your housing costs plus all additional monthly debt (41% ratio). These percentages may be exceeded with compensating factors. Applicants for loans may have an income of up to 115% of the median income for the area. Maximum USDA Loan income limits for your area can be found at http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html 

Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance.




Can I get an USDA Mortgage Loan after bankruptcy?

Criteria for USDA loan approvals state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, you are also eligible to make a USDA Loan application.


What are the USDA Down Payment Requirements?

USDA Mortgages have no down payment requirement. Other loan programs don't allow this.


What types of property are eligible?

While USDA Mortgage Guidelines do require that the property be Owner Occupied (OO), they do allow you to purchase condos, planned unit developments, manufactured homes, and single family residences.


What is the maximum amount that I can borrow?

The maximum amount for an USDA Mortgage Loan are determined by:

Maximum loan amount: The is no set maximum loan amount allowed for an USDA Mortgage. Instead, your debt-to-income ratios will dictate how much home your can afford (29/41 ratios). Additionally, your total household monthly income must be within USDA allowed maximum income limits for your area. Maximum USDA Loan income limits for your area can be found at http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html


Maximum financing: The maximum USDA Mortgage amount will be 100% of the appraised value of the home.

FHA Loans

Mortgage lending has been a quickly transforming environment within the last several years. Additional regulations and guidelines have resulted in hundreds of thousands of families that were able to buy or refinance a property just a couple years ago being unable to get approved for a mortgage loan. A growing number of home buyers are using government-insured FHA home loans because of the favorable terms that they offer, compared to other loan types.  

What is the Federal Housing Administration?

The FHA (quick for Federal Housing Administration) has been in existence since 1934 when it was founded in the course of the Great Depression. Since its inception over 75 years ago, over 37 million mortgages have been insured by the FHA in the United States. The FHA is the largest government insurer of home loans in the world today. FHA Loans have become so popular in today’s lending climate because they can be much more accommodating than other mortgages, but they do contain specific credit, income and property criteria for a mortgage to get approved. A number of the more crucial requirements are listed beneath. 

FHA Loan Income Requirements

The income verification and earnings capacity evaluation of the borrowers is an essential component of the FHA mortgage approval process because it shows the individuals capacity to repay the home loan. FHA loans utilize two separate DTI Ratios (Debt-To-Income Ratios) to determine a borrowers income eligibility. The initial ratio to be applied is the housing cost ratio (Top Ratio). To meet the Top Ratio requirements, the new month to month housing expenses can not exceed 31 percent of the borrowers total income. Housing expenses include principal and interest mortgage payment, taxes and insurance. Once it is determined that the housing ratio meets criteria for approval, the total expense ratio (Bottom Ratio) is applied. To meet Bottom Ratio criteria, the individuals complete monthly expenditures, including the new housing payment, can not exceed 43% of their total monthly income. Other expenses that are factored into the total expense ratio include credit card payments, car payments, student loans, and any other monthly payments that are to be paid. A borrowers credit report may be used to verify monthly expenses. 

FHA Loan Credit Requirements

To meet FHA loan credit criteria, the borrowers almost certainly be required to have a FICO credit score of 620 or above. The credit score used for FHA loan qualification is determined by obtaining the borrower’s scores from each of the three major credit bureaus, then eliminating the highest and lowest scores. This score is referred to as the “middle score” or “mid score”. Although the FHA has set its minimum credit score requirement at a 580 for many of its programs, individual lending institutions are free to add additional requirements and raise the minimum score as they see fit. It can be acceptable for the borrower to posses a bankruptcy in their past and still qualify, but you will find that additional guidelines will apply. If an individual possesses a Chapter 13 bankruptcy in their past, they must provide proof that all court ordered payments have been made on time for at least one year before application. If an individual has a Chapter 7 bankruptcy in their past, they must wait at least two years from the discharge date before application. 

FHA Loan Property Requirements

A home must have an FHA appraisal performed by a certified appraiser to be an acceptable property for an FHA loan. To satisfy the FHA appraisal requirements, the home must be in reasonably good condition. Certain disqualifying appraisal conditions may include but are not limited to structural problems, leaking roofs or missing exterior paint or siding. The property appraised value is extremely significant in the FHA loan process and the home must appraise for at least the purchase price. The highest FHA mortgage amount changes from county to county and metropolitan areas throughout the United States. The smallest maximum FHA loan amount in any county is $271,050, but can reach as large as $729,750 in particular high-cost locations.

Getting to know what you can afford

The rule is that you usually can buy three times as much as you make.  So if you make $50,000.00 per year, you can buy up to $150,000.00.


This will be in the perfect world of course and if you have absolutely no other debt, no car payment, no student loans, no liens, no credit card payments, etc.  The whole thing is based on something called a Debt-to-income Ratio.


What is the Debt to Income Ratio?


A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include certain taxes, fees, and insurance premiums as well. )


There are two main kinds of DTI, as discussed below.  The two main kinds of DTI are:

1. The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (Mortgage principal and interest, mortgage insurance premium [when required], hazard insurance premium, property taxes and homeowner's association dues [when applicable]).
2. The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.

Example:

In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:

• Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
  • $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
  • $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.

In order for your lender to get you pre-qualified for a mortgage and find out what you can afford, they have to review the following:

• Last Full Month Pay stubs
• Last 2 years W2's (or 2 years tax returns if you are self employed)
• Last 2 months Bank Statements
• Any Other Income you might receive (Proof for the last 3 months if it's Social Security or Disability, Pension, Alimony, Child Support. - This has to continue for the next 3 years in order to be considered usually)
• If you pay child support or alimony, you need to provide with divorce decree and child support court order or alimony order.
• Any Assets you may have (401K, Investments, IRA, Life Insurance, etc.)
• Review Full Tri-Merge Credit Report

Be honest with your lender, things do come up, if you fail to mention a lien or something that is bothering you but you are thinking about hiding, better not, talk to your lender about it, it's better to be honest up front so things do not come up later on and, believe me those surprises are not usually good.  They can delay closing or even cause the loan to be denied.

The lender will then review your paperwork and do a pre-qualification for you, with your income and your credit and by taking a loan application.

It is true that the better your credit score you are better off getting the best rate and a very good loan, but that doesn't help you necessarily to afford more for a house.  That is all up to your debt to Income Ratio.

Different Types of Loans will determine what DTI is acceptable.

Some of the best loans to get as per my experience are the following:

• Conventional 30, 20, 15 or 10 Year Mortgage  DTI    28/36
• FHA 30, 25, 15 years Mortgage  DTI    31/43
• USDA 30 years Mortgage  DTI   29/41
• VA 30 or 15 years Mortgage  DTI 41

It is really your lender's job to know which program is the best for your situation, if it is a good lender they will make the right choice for you.