Borrower Qualifications
The following summarizes what is necessary to be eligible and qualified for a USDA loan.
Eligible Homeowner Status
The family must be one that does not own a home in the local commuting area or a home which is not structurally sound, functionally adequate.
Therefore, if (1) the family already owns a home in the local area, and if (2) the house is structurally sound, and if (3) the home is adequate for the size and needs of the family, then they are not eligible for the USDA loan until they sell the current home or transfer ownership legally and in compliance with any mortgage(s) held on the property.
However, if (1) the home currently owned is no longer in the local commuting area due to a relocation, or if (2) the home is not structurally sound, or if (3) the home is not adequate to meet the current needs of the family, the family may retain the current home and buy a new home with the USDA loan.
It is important to note that a modest increase in family size alone usually would not allow the lender to conclude the current home is not adequate. It is a case-by-case decision, but as a general rule two children per bedroom is considered practical.
If the family is eligible to retain a current home and purchase a new home with a USDA loan and that family elects to rent the home, that rent may be used to offset the current mortgage if certain conditions are met. More >>>>>>>>
Therefore, if (1) the family already owns a home in the local area, and if (2) the house is structurally sound, and if (3) the home is adequate for the size and needs of the family, then they are not eligible for the USDA loan until they sell the current home or transfer ownership legally and in compliance with any mortgage(s) held on the property.
However, if (1) the home currently owned is no longer in the local commuting area due to a relocation, or if (2) the home is not structurally sound, or if (3) the home is not adequate to meet the current needs of the family, the family may retain the current home and buy a new home with the USDA loan.
It is important to note that a modest increase in family size alone usually would not allow the lender to conclude the current home is not adequate. It is a case-by-case decision, but as a general rule two children per bedroom is considered practical.
If the family is eligible to retain a current home and purchase a new home with a USDA loan and that family elects to rent the home, that rent may be used to offset the current mortgage if certain conditions are met. More >>>>>>>>
Eligible Annual Income
The family must have household income that is within the income limits. USDA loans are intended for moderate-income families, those having annual household income at or below 115% of the median income for the area. USDA provides a website that shows the income limits by state, county, and family size. More >>>>>>>> Applicants can also get a preliminary determination of income eligibility through the USDA website. More >>>>>>>> It should be said that all household income is counted, including the income of adults who are non applicants of the loan.
Adequate Income
The family must have adequate income measured by debt-to-income ratios. The total housing payment (principal, interest, taxes, and insurance) must not exceed 29% of the gross income of the borrowers. In addition, the total housing payment plus the other financial liabilities of the borrowers must not exceed 41% of the gross income. It should be noted that in community property states, the financial liabilities of a non-purchasing spouse are also included. The 29/41 ratios may be exceeded with strong compensating factors more >>>>>>>> and/or with a GUS accept recommendation. Information about GUS, the computerized underwriting tool, is found on the benefits page. More >>>>>>>>
Dependable Income
The family must have dependable income that is gauged by the history of income and employment. There is no minimum length of time an applicant must have held a position to consider employment income as dependable. In fact, the applicant may have frequently change jobs so long as there is income continuity. Two years of continuous employment and income usually sufficient to conclude the present income is likely to continue. Lenders may consider college, technical school, military service to be part of the two-year employment history. Self-employment income and other sources of income are also taken into account. More >>>>>>>>
Acceptable Credit History
The family must have an adequate and acceptable credit history. Fortunately, USDA allows lenders to consider nontraditional credit when there is a lack of traditional credit more >>>>>>>> and also approve adverse credit waivers when the circumstances were of a temporary nature, were beyond the applicant's control, and have been removed. More >>>>>>>>
Cash Reserves
As a general rule, USDA does not require a family to have minimum cash reserves. This is a benefit over other programs that require families to have cash post-closing reserves equal to several mortgage payments. However, the lender will likely require reserves if there is payment shock as evidence that the family has the ability to devote a greater portion of income to a housing expense. More >>>>>>>>
Cash to Close
In some cases, the family may need cash to close:
--There is no down payment requirement.
--The loan is based on 102% of the appraised value, so unless the value is less than the sales price, the loan covers the sales price and the 2% USDA guarantee fee.
--The prepaid items and closing costs are customarily paid with a seller concession in the current market.
--If there is no seller concession, the family may get a lender credit to pay the settlement costs by taking a slightly higher note rate without significantly increasing the monthly payment.
--The family can take a higher loan to cover the settlement costs if the appraised value is higher than the sales price, which is not uncommon with the number of foreclosures and distressed sales in the current market.
If, however, none of the conditions exists or the family elects to pay settlement costs out of pocket, there obviously needs to be sufficient cash seasoned and documented in the families bank or investment account.
