While qualifying for a home loan today can often be difficult, USDA rural loans offer an important alternative for low- and moderate-income borrowers in rural areas. USDA rural loans have less stringent qualification rules than most loan programs. Their guidelines on income and credit are less strict. They permit gifts and seller contributions, and they do not require mortgage insurance and, probably most importantly, they do not require down payments.
USDA Acre Limits
USDA rural loan criteria do no limit the number of acres they property has if the property's tillable, or farmable, acreage is less than 30 percent of its total value. However, if the value of the property's tillable acreage is more than 30 percent, the site can still qualify if the appraiser determines that the property is typical for the area and cites comparable properties with similar acreage to support his decision. The appraiser also has to make sure that the property cannot be subdivided. In addition, the property cannot have income-producing buildings.
Other Qualification Rules
Other qualification criteria may be more troublesome. The property must be in a rural area or small community, as designated by the USDA. Loan applicants cannot have incomes of more than 115 percent of the area's median income and must occupy the home as their primary residence. According to the USDA, loan applicants must be without adequate housing, but must be able to afford the loan payments, including taxes and insurance. USDA says applicants must have reasonable credit histories, but does not have an official minimum credit score. Most lenders offering USDA rural loans require credit scores over 620. The required repayment ratio is 29/41, meaning your monthly housing-related payments cannot be more than 29 percent of your total monthly income, and your total debt payments cannot exceed 41 percent of your income. Exceptions are sometimes possible.
The zero down payment features is probably the most important benefit of USDA rural loans, as down payments are typically the largest expense for home buyers. In addition, borrowers don't have to pay monthly mortgage insurance, which insures the lender, not the homeowner. Closing costs can be financed, or added to the total loan amount, as long as the loan is not larger than the property's value. Plus, the program is not limited to first-time homebuyers. The USDA boasts that its mortgage rates are competitive and that its 30-year terms offer reasonable, predictable payments.
Credit guidelines are less stringent than those of standard mortgages, allowing home buyers with imperfect credit histories to purchase homes. The program accepts non-traditional credit, or payment histories from other than credit cards and personal loans, and it can allow streamlined credit documentation for faster approvals for some borrowers. Instead of lending money itself, the USDA guarantees the loans made through lenders it has approved. Borrowers hoping to apply for a USDA rural loan can apply to state housing agencies, HUD-approved lenders, or a FCS (Farm Credit System) institution with direct lending authority.