Understanding Eligibility For The USDA Guaranteed Home Loan
Are you wondering whether or not you might be eligible for a USDA Home Loan? There are some basic requirements for loan eligibility that are set by the Department of Agriculture.
The overall purpose of these loans is to ensure a reasonable rate of real estate development and home ownership in areas deemed rural and those traditionally associated with agriculture.
In the past, it has often been difficult for people who make their living through professions related to agriculture to afford a home. However, the USDA Guaranteed Home Loan Program makes it easier not only for them but for others in rural areas.
If you are a resident of a rural area and have low or moderate income, you may be eligible for a USDA guaranteed home loan. However, there are details that have to be in order.
Those who borrow successfully under the program are often able to borrow 100% financing and will benefit from a zero down payment option. But, both the borrower and the property must meet certain eligibility requirements.
The Department of Agriculture is a federal department of the United States government. It has operated the Guaranteed Home Loan program for decades in an effort to make it easier for those in rural areas, having steady but low or moderate income, to obtain a home.
What is a rural area? This is one of the most important definitions of eligibility. Luckily, it is very easy to understand: Most qualified rural areas will have a relatively low population. The majority of qualified rural areas have a permanent population of less than 25,000.
What are other expectations there for potential borrowers? They are as follows:
- Steady, uninterrupted income up to 115% of the AMI: The Area Median Income (adjusted)
- A decent credit history free of any recent, major issues that might impact the ability to pay
- Inability to qualify for conventional mortgage loan credit, which can be demonstrated
- No judgment liens against the would-be borrower for any debt owed to the government
- No current delinquency on any debts, whether they are or are not tax-related
To decide once and for all whether or not a potential borrower may qualify, there are some formulas that can be used. They are as follows:
1) The regulatory agency calculates a borrower's PITI, that is, the total amount of the borrower's principal, interest rates, and insurance. It must be 29% or less of the applicant's gross monthly income.
2) Total indebtedness, which can include all accounts that will not be paid off within a certain number of months, must not exceed 41% of the gross monthly income.
It is important to understand that the program is not limited to people purchasing their first home. Even if you currently own a home, you might qualify for USDA funding if you are seeking to purchase a property within a qualifying area.
In order for lenders to be willing to provide mortgage loans at reasonable rates to people of low and moderate income, the United States Department of Agriculture has stepped in to reduce the risk associated with these loans.
This helps lenders by ensuring that they are more likely to receive their anticipated profit from a given loan and helps borrowers by allowing them to access financing at much more reasonable and favorable rates than would otherwise be possible.
What kinds of properties can be purchased using this type of loan?
- A single-family (one unit) family dwelling
- A modular, mobile, or prefabricated home
- A townhome
- Certain condominiums (with prior approval)
- Manufactured homes
You have the opportunity to access this funding even if you currently have a home. However, the property you purchase using USDA funding must be intended as your primary residence.
USDA home loans can be used for new manufactured homes that are permanently installed in one location, but might not be available for all existing manufactured homes. Likewise, all of the eligible property types must be in livable condition.
USDA home loans are frequently used to encourage the growth of small communities and to strengthen the real estate market. Even though there are other federal home loan programs that can be quite reasonable, only the USDA program provides a true 'no money down' option.
Basic qualifications include:
- Residence in a qualifying rural area with income not exceeding that area's limits.
- Willingness and capability of repaying mortgage obligations, plus 24 months' steady income.
A credit check must indicate at least 12 months of steady payments on all obligations, with no more than one late payment in that time. There are some other disqualifying factors as well:
- The applicant usually can't have had a previous Rural Development loan that resulted in material losses to the government unless it was beyond the applicant's control and this has been researched and verified.
- The applicant must not already own a home within the community that meets basic standards of habilitation and that meets the needs of the applicant's household (family).
- The applicant must be a U.S. citizen or a qualified alien.
- The applicant must be legally competent to take on the loan obligation.
- The applicant must either personally occupy the property or have the intent to do so.
Why are the loans offered only in specific locations?
Smaller communities provide much more limited lending options than larger ones. This can make it difficult for potential homebuyers to achieve their goals in a smaller community, so the government must incentivize the process.
What are the down payment requirements for this loan?
There is no required down payment for a USDA guaranteed home loan.
How is eligibility determined for this loan?
Two formulas are used: One adds up the entire burden of a borrower's principal, taxes, insurance, and interest, which must not exceed 29% of monthly gross income. The other takes into account all indebtedness, which must not exceed 41% of that income.
What fees are associated with this loan?
There is an upfront fee of 2% of the total loan amount and an annual fee of .40%.
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