Although related to the FHA loan, USDA loans use a different set of criteria to qualify a borrower wishing to purchase a new home. With USDA you can only earn up to $6,000 per month in income maximum. If you, or you and your spouse, earn more you will not qualify with USDA and FHA will most likely be the next logical program to try to qualify under. 

With this $6,000 maximum income, your loan amount will be limited because your monthly payment will be limited. For example if you are earning $6,000 per month you can only borrow up to a loan amount that allows you to max out your principal, interest, taxes and insurance at about $2,700 per month.

At 5% you can probably borrow up to $400,000 and still qualify for a USDA loan. That is because $400,000 would have a principal and interest mortgage payment of $2,222, add $300 per month for property taxes and $100 per month for homeowner’s insurance and your total monthly bill is around $2,622. $6,000 of income is just a little bit over twice the amount of the debt ($2,622) and so your debt to income ratio would be fine.

In this way, by limiting the amount of income a borrower can make in order to get a USDA loan, the government program is also limiting the maximum loan amount that a borrower can borrow.

One other important criterion about USDA is that generally this program is for rural type housing. In my county in southern Oregon, all but just the center of our only nearest city is eligible. I have not looked up the eligibility status of very many areas, but more than likely those of you who live in a metropolitan area will not be eligible. The eligibility of an area is based on your zip code so if you plug in your zip code at the USDA website, it will let you know if you are eligible.

In order to work with the USDA program, there is only an upfront fee, which now is at 3.5%, of the loan amount. For a $200,000 loan that would add $7,000 to your total loan amount. However, USDA does not have an additional monthly mortgage insurance payment added to your loan as does FHA. So although you pay a steep premium to get an FHA loan, in the long run the monthly mortgage payment will be lower than the same loan using the FHA formula.

One final note about USDA: Sometimes lenders have government money to finance USDA loans and sometimes they don’t. If you are interested in USDA financing, you will have to keep up on when the government is offering funds for this program and which lenders are accepting USDA type loans at the time.

More than likely it will take a skilled and experienced home loan specialist to determine if USDA is the right loan program for you. At First Priority Financial we take pride in knowing the various loan programs that are available for your financial situation, and are diligent in educating you so that you will understand why a particular loan program is best for you.