The federal government offers a few different loan programs to help homebuyers gain access to mortgage loans. The U.S. Department of Agriculture sponsors several homeownership programs, which are geared towards low and middle-income buyers who live in rural areas.
Besides offering low interest rates, taking out a USDA loan means you don’t have to put any money down on the home you’re buying but not everyone qualifies. If you’re thinking of applying for a mortgage through the USDA, here are five reasons you could be denied.
1. You don’t have a great credit score
Conventional loans, FHA loans, VA loans and USDA loans all have a minimum credit score that you need to meet and some loans are more lenient than others. With a USDA loan, borrowers are required to have at least a 640 credit score to be considered for automatic approval.
If you have a score between 600 and 639, your application can be considered for manual underwriting but only if you have some significant compensating factors. For example, you may still be able to get approved if you’ve got a lengthy work history, you’ve built up some savings or you’re on a career track that’s likely to result in a higher salary down the line.
You can’t have had more than one late payment reported on your credit in the previous 12 months. If a low credit score is the result of a previous bankruptcy filing, you won’t be able to get a USDA loan until at least three years have passed since the discharge. If you have a judgement on your credit, it has to be at least one year old.
2. You’re sitting on a decent chunk of cash
USDA loans are intended to be used by people who otherwise wouldn’t be able to get a conventional loan. As such, they have no down payment requirement but you’ll still need money to cover your closing costs. The one mistake you don’t want to make, however, is having too much money in the bank. If you’ve got enough assets to put down 20% or more on the home you’re buying, a USDA loan would be a no-go.
3. Your debt to income ratio is too high
In the simplest terms, your debt to income ratio is the amount of your monthly income that goes towards debt. Generally, the USDA prefers that borrowers be spending no more than 29% of their monthly pay on housing and no more than 41% on debt payments overall. If a substantial chunk of what you’re making is going towards student loans, credit cards or car payments, you’re likely to have a harder time getting a lender to approve you for a USDA loan.
4. The home you’re buying isn’t in an eligible area
The USDA loan program specifies that homes must be located in a designated rural area but that definition is fairly broad. If you live in a suburban area that’s outside a larger city, for example, you may still be able to qualify. On the other hand, if the house you’ve got your eye on is in the middle of a bustling metropolitan city, it’s likely not going to meet the USDA’s standards.
5. You make too much money
One final caveat of the USDA program is that it’s restricted based on how high your income is. Income limits are determined by your household size and the area where the home is located. If your income is more than what’s allowed for your area and family size, you’ll have to look into an FHA or conventional loan instead.
Check your credit before you apply.
If a USDA loan sounds appealing, take some time to review your credit before you apply. If your score isn’t as high as you’d like it to be, take our quick two-minute assessment to find out how you can get it back on the right track.