USDA

What is a USDA loan?

With a USDA loan, you can finance up to 100% for a home purchase or a refinance (must currently have a USDA loan to refinance). These loans are guaranteed by the United States Department of Agriculture (USDA) but are serviced by lenders who meet federal guidelines.

Applicant Eligibility

  • Have the ability to personally occupy the dwelling
  • Be a citizen of the United States or be admitted for permanent residency
  • Non-occupant co-borrowers are not permitted
  • Generally, borrowers must sell their existing home

Income

  • Applicants must have adequate and dependable income, typically with a history of 24
    months.
  • Qualifying ratios are 29/41; however, higher ratios considered with strong compensating factors, including good credit scores (680+), stable employment history, potential for increased earnings, and ability to save.
  • Income to be verified with a written VOE and one month’s current paystubs, OR one
    month’s paystubs and two years of W2’s.
  • 2/1 buydowns qualifying ratios are calculated using note rate.
  • Debts with more than 6 monthly payments remaining must be included in qualifying
    ratios.
  • Student loan payments must be included in ratios even if loans are currently in
    deferment and payment must be verified by servicing lender.
  • Disability and Social Security benefits – 3 year continuance documented with award
    letter or 2 months bank statements, grossed up 125%.
  • Salary increases within 60 days of the first payment due date are acceptable.
  • Part time employment must have a history of no less than 12 months.
  • Alimony and child support income must continue for 3 years and have no less than a 12
    month history.
  • Any income of a non-purchasing spouse must be verified to make sure income limits are
    not exceeded.

Income Calculations

USDA Rural Development determines applicant’s income in two manners:

Eligibility Income – Includes all income (salary, tips, bonus, overtime, alimony, child support,
etc..) received by the applicant and co-applicant(s). This income is used to calculate qualifying
ratios.

Adjusted Income – This is the applicant’s eligibility income less the total of any of the following
deductions applicable to the loan. Income from all household members must be included in the
total adjusted income. This adjusted income must not exceed 115% of the median household
income for the area. (see spreadsheet).

Allowable Deductions to Determine “Adjusted Income”:

Member of Household Amount of Deduction
Each minor child under 18 years of age $480
Each disabled or handicapped individual who is not the applicant or co-applicant $480
Each full time student 18 years or older $480
Each elderly (62 years of age or older) or disabled applicant $400
Medical expenses for any elderly family member Total that exceeds 3% of gross annual income
Child care expenses for children 12 years old or under Actual cost of care, supported by full documentation of cost

Credit History

Applicants must have a credit history that indicates a reasonable ability and willingness to meet obligations as they become due. A credit history reflecting any or all of the following is considered unacceptable credit history:

  • More than one 30-day late within the past 12 months.
  • Bankruptcy or foreclosure discharged less than 36 months.
  • Outstanding judgments within the past 12 months.
  • Two or more rent payments 30 days late within the past 3 years.
  • Outstanding collection accounts with no payment arrangements.
  • Outstanding tax liens or delinquent federal debt with no payment arrangements.
  • Accounts converted to collections in the past 12 months.

Mitigating Factors to Unacceptable Credit

Adverse credit waivers may be granted for mitigating factors to establish the applicant’s intent to good credit. Lenders must document these circumstances which were beyond the borrower’s control and have been removed:

  • Circumstances for adverse credit were temporary in nature, beyond the applicant’s control and have been removed. Examples: increased expenses due to illness and/or medical expenses, injury, death, etc.
  • Tri-merge credit reports are required and must be no more than 90 days old at the time the Conditional Commitment is issued.
  • Applicants must not be delinquent on any debts owed to the Federal Government.
  • CAIVRs must be checked and documented in the loan submission package.

Streamlined Underwriting Criteria (Credit score 640 or higher)

For borrowers with a credit score of 640 or higher, lenders may evaluate loans utilizing USDA’s streamlined underwriting guidelines.

Lender shall not be required to document adverse credit history except for those involving a delinquent federal debt or previous agency loan.

Lender shall not be required to obtain a rental history rating.

No action will be necessary for any derogatory items, (i.e. no letters of explanation, unpaid collection accounts not required to be paid off, etc…).

The credit score of the primary wage earner should be given the most emphasis; however, credit scores of other applicants will also be included in the overall review of the loan request. Use the middle of three (3) scores or the lower of two (2) scores for all borrowers.

Credit score of 639 to 580

Statistically, borrowers with credit scores within this range demonstrate a higher likelihood of default and therefore, lenders should evaluate loans carefully and be cautious of layered risk in addition to the lower credit score. For example, a ratio waiver should be avoided unless strong compensating factors are present. In addition, lenders should be cautious when applicants have no rent or housing history to verify.

If an adverse credit history waiver is requested, the lender must document that the
circumstance:

  1. was temporary in nature, and
  2. beyond the applicant’s control, and
  3. has been removed so reoccurrence is unlikely.

Debt Ratio Waiver Request and Agency Approval

Debt ratio waivers must be requested and documented by the approved lender, otherwise the loan file will be denied. The Agency will review the debt ratio waiver request when all of the following conditions are met:

  1. The lender requests Agency concurrence with the debt ratio waiver by submitting a signed underwriting analysis that captures one or more of the above compensating factors.
  2. The PITI is between 29 and 32 percent or the TD ratio is between 41 and 44 percent;
  3. The underwriting credit score is 680 or greater for all applicants; and
  4. The lender provides evidence of the compensating factor(s).

Acceptable Compensating Factors and Supporting Documentation:

  • The proposed PITI (proposed housing expenses) is equal to or less than the applicant’s current verified housing expense for the 12 month period preceding loan application. Verification of housing expenses may be documented on a Verification of Rent (VOR) or credit report. The VOR or credit report must include the actual payment amount due and report no late payments or delinquency for the previous 12 months. Rent or mortgage payment histories from a family member will not be
    considered.
  • Accumulated savings of liquid assets or cash reserves available post loan closing are equal to or greater than 3 months of PITI payments. A Verification of Deposit or two consecutive bank statements, dated within 45 days of loan application, that document the average balance held by the applicant is required. Cash on hand is not eligible for consideration as a compensating factor.
  • The applicant(s) (all employed applicants) has been continuously employed with their current primary employer for a minimum of 2-years. A “Request for Verification of Employment” (VOE) (Form RD 1910-5, equivalent HUD/FHA/VA or Fannie Mae form, or other equivalent), or VOEs prepared by an employment verification service (The Work Number, etc.) must be provided. This compensating factor is not applicable for self-employed applicants.

Does the USDA purchase or refinance program appeal to you?  Call us today!

1-800-444-RATE (7283)