The USDA Rural Housing loan is still somewhat of a secret to many Tennessee first-time home buyers. This government backed 100% home mortgage offers a home-buying opportunity hard to find these days. USDA ( also called 502 Guaranteed, RD, Rural Development, or Rural Housing) not only allows Tennessee buyers a way to purchase a home with NO down payment but also comes with a lot of other perks.
In the post below we will discuss all the important USDA eligibility and loan qualifying criteria. First, let’s discuss some of the pros and con’s of the 100 percent USDA loan:
USDA Mortgage “Pros”
- USDA is the only mortgage program today (for civilians) that allows a home purchase with no down payment.
- In addition to no down payment, USDA allows for buyers to get their closing costs paid by the home seller, or added into their loan under certain circumstances.
- USDA loan applicants are NOT required to be first-time homeowners.
- The USDA home inspection and appraisal requirements are the same as the other loan programs today – no special requirements.
- Home buyers are NOT required to have a minimum amount of savings.
- Secure and safe 30 year fix terms at low-interest rates.
- No USDA loan amount limits – home buyers qualify based on their income and debt-to-income ratios.
- Lower monthly mortgage insurance. USDA requires monthly mortgage insurance costs each month like most home loans when the buyer is putting down less than 20%. The benefit with USDA is the monthly PMI costs is nearly 30% less than FHA or conventional loans. Already pre-approved for an FHA loan? Be sure to check into the USDA as well for cheaper mortgage insurance, it could save you hundreds each month.
- Applying for a USDA loan doesn’t require any special education, first-time buyer class or down payment assistance – it’s already 100% financing. Borrowers can get pre-approved and start searching for a home all on the same day.
USDA Mortgage “Cons”
- The property to be purchased must be located in a USDA-approved area. In addition the USDA program has income caps – please read below for more info.
- Student loans – Student loan debt is not deferred when qualifying for a USDA loan. Because of this, USDA loan applicants with significant student loan debt may have encountered obstacles in regard to debt-to-income ratio limits.
- Closing time frame – The USDA loan program is unique because the loan files are processed in two stages. First by the lender, bank or broker originating the loan, then the file goes through a final review at the local USDA office. This means that USDA loans will take a few extra weeks to close when compared to FHA, VA or Conventional loans. Please note: USDA 502 Guaranteed loans can only be proceed by approved mortgage companies, not directly by the USDA. USDA only processes their “Direct” loan in house. This program is geared towards very low income, subsidized housing.
Tennessee USDA Loan Eligibility
The USDA mortgage has a few core eligibility requirements that must be met in order to use the program. Let’s take a closer look below.
- The location of the house – The house you decide to purchase must be located in a select rural approved area according to the USDA property map here. You can input the property address and check to see if the house resides in an eligible location. The home can be any single-family, townhome and select FHA-approved condo. Mobile homes and manufactured homes are not allowed. If you need assistance finding USDA-approved homes in your area, please contact us below.
- The income for the household – The USDA Rural Development mortgage has income limits or “caps” in place. More importantly, the income caps apply to all income producers living in the house, even if they are NOT listed on the loan application. USDA limits vary based on the number of members living in the household, number of dependents, elderly, and county. Contact us below to discuss in detail.
USDA Loan Approval Standards and Guidelines
USDA is not much different than other home loans in the fact they have standard qualifying guidelines that must be met. Let’s discuss the USDA guidelines below:
- Credit Score – USDA lenders will want to see applicants have a 620 or greater credit score to be approved. However, a 620 credit score do not guarantee loan approval. All mortgage companies have additional requirements in place for applicants that have experienced a past financial hardship like foreclosure, short sale or bankruptcy. These are called “overlays” For Example – if you have a 680 credit score, but had a foreclosure 2 years ago, you would likely need to wait additional 1-2 years.
- Job/Income History- Two years of stable income will likely be needed. You are not required to have the same job for two years, just a stable history. Example: Let’s say you have been working as school teacher for 4 years. You recently left one school and started working at another school. In addition, you took a few weeks off in between. This is okay! Or maybe you needed to take a month off for hardship reasons – this likely would be okay as well. Recent graduates are the exception of this rule as they do not need a solid a two-year job history. Self-employed borrowers will need two years of tax returns. Any part-time jobs will need two years of stable history to be included.
- A copy of the borrower’s bank statements will be needed during the approval process. Although USDA does not require a certain amount of savings, applicants will want to insure they can document any deposit out of the ordinary. Normal weekly, bi-weekly or monthly payroll deposits are normal and to be expected. However, random deposits will be documented with a copy of the check, and deposit slip. Gift funds are allowed with USDA loans, just be sure to keep a proper paper trail when it comes time to document. Additionally, the gift donor may be required to provide their bank statements as well. These requirements are not exclusive to USDA loans, they are essentially required on all government loans today.
Have questions or want to learn about getting pre approved? Please call us today at 800-743-7556 or just fill out the quick contact form on this page.
Buyers can read more helpful USDA purchase FAQ’s here.
Happy to serve all Tennessee home buyers: Memphis, Nashville, Knoxville, Chattanooga, Clarksville, Murfreesboro, Jackson, Johnson City, Franklin, Hendersonville, Kingsport, Bartlett, Collierville, Cleveland, Germantown TN
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