USDA loans are a great way to purchase your first home, but unfortunately many don’t know they exist.
After all, homes probably aren’t the first thing that comes to mind when you think of the USDA.
I get many questions from potential homeowners who are not sure of the USDA loan requirements in Texas, let alone how they can benefit from them.
Here are some general questions that affect most people seeking these loans, and they will help you have the right idea to get the mortgage loans in the US.
What Is a USDA Loan?
USDA loans are guaranteed and backed up mortgage loans provided by the United States Department of Agriculture (hence the USDA) to people who are in low to moderate-income classes or levels.
They are provided when an individual is looking to buy a home in rural or suburban regions in order to build a better and satisfying life.
The department offers two types of mortgage loans-
- Guaranteed: the USDA backs up the loan. You can only apply and get it when you go through a participating lender.
- Direct: the loan is issued directly by the USDA. There is no third party involved, and you apply with the USDA.
Most people may not understand the difference between government-backed loans such as USDA or VA loans and conventional loans.
Simply put, a government-backed loan is secured through a federal agency allowing the homeowner to put no money down.
If you happen to default on the government’s mortgage-backed, the department covers the lender. Most lenders like engaging in government-backed mortgages since it acts as an insurance policy and reduces their risk.
Therefore, lenders are more willing to give out loans through the USDA.
How Does A USDA Loan Work?
I have already mentioned that you can apply for two types of loans when applying for the USDA. However, the home loan programs work in three ways-
You may not need any down payment since the loan is guaranteed.
It is the perfect loan to use – if you qualify – when you’re trying to buy your first home.
These loans come directly from the USDA and are offered to low and very-low-income applicants. The income thresholds to determine the low-income applicants vary from one region to another.
I like this type of loan because the subsidies and interest rates are as low as 1%. You pay as much as you borrowed. Therefore, it is an outstanding loan to take when your income may be low, and you need to get your home as soon as possible.
Home Improvement Loans and Grants
Just as the name states, you can get these loans when you need to repair or renovate your home. The combined loan and grant are $27,500.
Of course, there are other requirements attached to these, but nonetheless available if you qualify.
Do USDA loans have PMI?
USDA loans don’t have PMI.
PMI is needed for most loans when you can’t afford the 20% down payment for conventional loans. For the most part, PMI insures the lender if you default on the loan.
If you haven’t noticed, lenders are all about managing risk.
Without a PMI, the USDA loans will require an individual to have two different mortgage insurance forms that act as monthly mortgage insurance premiums. You will pay an upfront guarantee fee (aka funding fee) and an annual fee.
Typically, the upfront fee is around 1% of the home value whereas the recurring annual fee is around 0.35% of the value. That is around $3,000 upfront on a $300,000 home and around $1,000/year. Still less out of your pocket than a PMI.
The two fees plus the USDA land’s total costs are usually significantly lower than any other loan options.
The lack of PMI and the fewer costs you need to pay for your insurance premium make USDA loans unbeatable.
What qualifies for a USDA loan?
Unlike most loans, USDA loan requirements in Texas depend on both the buyer and the property to qualify for the program.
Something to keep in mind is that there are two factors that must qualify – the homeowner as well as the home or land you’re purchasing.
While property eligibility is a consideration, most homes throughout the US can qualify for a USDA loan.
Take a look at the USDA property eligibility map. The darker areas (i.e. urban areas) don’t qualify, but a major part of the US does. The driving factor for property eligibility is rurality.
On their map, you can either enter an address you’re interested in or zoom in on the map to get an idea of what areas qualify.
In my area, Bell County, TX, the city limits of cities with a population of over 30,000 don’t qualify. However, smaller towns and unincorporated areas do. These are just some of the requirements you have to consider when looking at USDA loans in Texas.
To be eligible for a USDA loan, you’ll have to meet some basic qualifications-
- Be a US citizen or a legal permanent resident.
- You need to be earning from low – to moderate-income. The calculation for income depends on where you live and your earnings.
- Proof of stable income over the past two years.
- A good credit history. The credit score maybe is around 640 or higher. This is not a hard rule, some lenders may accept a lower score.
- The monthly mortgage payments should not be above 29% of your monthly income.
The USDA website has a form you can fill out to determine your eligibility. It will ask you for the state, county, total persons living in your home, and income.
But keep in mind there are different income requirements for the different types of loans. Remember the guaranteed and direct loans we mentioned? The income requirements for the direct loans are lower than those of the guaranteed loans.
For example, in the county, we used in the property eligibility above the Section 502 Direct Rural Housing Loan Program maximum adjusted income is 51,100. For the Section 502 Guaranteed Rural Housing Loan Program, the maximum adjusted income is $90,300.
This should give you an idea of whether or not you might qualify for a USDA loan.
How much will the USDA loan approve me for?
Unlike most other programs, the Rural Housing Loan Program does not have any limits to how much you can borrow.
Sounds amazing, right?
Not so fast. The restrictions really boil down to you as the buyer.
The USDA will take in several factors to determine how much you can borrow and these include-
- Pending debts and income.
- Your credit score.
- Assets and savings.
- Previous rental or your mortgage payment history.
In essence, how much you can borrow will rise with your qualifications. Again, it’s about the risk.
How do I get a USDA loan?
Getting a USDA loan is just as easy as any other loan. Sure, you’ll need to get some documents together, but that’s to be expected with any loan.
The best thing you can do to get started is talk to a lender that works with these types of loans. Personally, I prefer local lenders instead of large lenders. You get more of a personal touch.
To get ahead of the game, you can start by getting the following documents together. These are the USDA loan requirements in Texas your lender is going to ask for-
- Proof of US citizenship or permanent residency in the country.
- Confirmation on non-citizen national or qualified alien status.
- Credit score report (although they’ll pull it, but it’s good for you to know).
- Tax returns for the last two years.
- Bill documentation and financial obligations.
After collecting these documents, reach out to USDA approved lender in the area you will live in.
The lender will take all the documents needed and start the mortgage application process through USDA financing. Each state has a commonly guaranteed loan coordinator who can help with the search.
Hopefully, you’re ready to move forward with your home-buying process and open to looking at homes in rural areas. Additionally, you should have a general understanding of the USDA loan requirements in Texas so you can start looking at homes.
In case of any questions, don’t hesitate to ask me. We can discuss more on the USDA loans, and I will help you understand any part of the loan puzzle you don’t comprehend.