Many consumers today do not have a sizeable down payment to put down on a new home, which deters them from purchasing a home at all. With many lenders requiring large down payments, tight credit restrictions and using a stringent verification process, getting a mortgage might seem impossible. For those that do not have the assets to have a large down payment and have minimal income, there are options. Of course, for veterans, there is the VA loan program, but for those not in the military, there are USDA loans, also known as Section 502 loans. Unfortunately, these loans have the stigma of being only applicable to farmers – the good news they are available to others as well in an effort to provide housing for low income families.
What Areas Qualifies for a USDA Loan?
USDA loans are applicable in rural situations, not just farms. Rural is not what it used to be, however. There are many situations that banks will qualify as “rural” for the purposes of this loan that you might not consider rural yourself. The areas are predetermined by the USDA and are easily determined whether or not they are eligible by navigating the USDA website and plugging in a specific address or area that you are interested in purchasing. The eligibility is determined by the census tract, determining the population in certain areas, which is how it is determined whether or not the area is considered rural.
As with any loan, there are income requirements to get approved for this type of loan. The determining factor in this case, however, is how high a person or family’s income is compared to the area that the home is that they would like to purchase. In general, total income cannot exceed 115 percent of the average income in the area. You can determine the area’s median income on your own through the government’s website or you can consult with your mortgage lender to determine where you stand. The general purpose of the USDA loan is to provide housing and loans for very low income borrowers.
Unlike most other loans on the market today, there is not a strict minimum credit score that you must have in order to apply for the Section 502 loan. There are general guidelines, but there is not one number that you cannot be below. In general, your debt-to-income ratio needs to be below 41 percent for your total expenses and you need to be at least two years out of a discharged bankruptcy. The home that you are purchasing also needs to be your primary residence. A guideline that you likely will not find in any other loan is the need to be without adequate housing when you are looking for a home, yet you need to be able to prove that you can afford the new mortgage payment. In general, lenders look at the overall picture regarding your lending risk in order to determine if you are eligible for a USDA loan.
USDA Loan Terms
The terms are another unique factor of the USDA loans. You can find terms up to 38 years for those borrowers whose income falls below 60 percent of the average income in the area. In general, the average term is 30 years for these loans, but borrowers that are unable to afford the 33 year amortized payment may be eligible for a 38 year term.
In order to be eligible for the Section 502 loan, the home needs to be modest in comparison to the other homes in the area. The value cannot exceed the maximum loan amount for that specific area as well. Everything about the home should be modest including its size, features and price in order to be eligible.
USDA loans are a great way to get into a home when you are without housing. You can have the benefit of home ownership without feeling overwhelmed by large payments or the need to put down a large down payment. There are many areas throughout the country that are eligible for the Section 502 loans; it is worth talking to your lender about your eligibility if you are a low income family without current housing.Click to See the Latest Mortgage Rates»