Before applying for a Kentucky Rural USDA loan, it’s helpful to understand their requirement in more detail, so they’re explained further below. Loan requirements can change at any time.
1. Credit Requirements for a Kentucky USDA Mortgage When applying for a USDA home loan, the lender will pull the borrowers credit report from all three credit bureaus. This is called a tri-merge credit report. The lender then looks at credit scores and the credit history to determine if the applicant is eligible, credit-wise.
Eligible borrowers must to have a middle credit score of 640 or above with no late housing payments for at least one year. If the applicant had a bankruptcy or foreclosure in their 3 past years, they must show that an acceptable amount of time has passed since then over the 3 year period with no lates.
USDA loan credit requirements use the following conditions for approval:
- Middle FICO credit score of 640 or above. USDA will on paper say they go down to a 580 score but it is very difficult to get them approved and closed through the automated process of getting loans approved in the modern day mortgage era.
- All bankruptcy payments made on time during the last year (Chapter 13).
- At least three years passed since a foreclosure or bankruptcy (Chapter 7).
2. Income Requirements –
USDA mortgages are unique in that they have minimum income requirements as well as maximum income limits that borrowers must meet. Simply put, there is a ‘sweet spot’ in between the lower and upper limits applicant’s must fall between. To see if a borrower falls within the ‘sweet spot’, USDA employs debt-to-income ratios (DTI) to check the minimum limits and set maximum household limits for various areas around the country. All income must be documented properly though pay stubs, W-2’s and tax returns, otherwise it doesn’t count.
Debt-to-Income Ratios (Minimum Income)
The first DTI ratio for a Kentucky USDA loan requirements employ is the “Top Ratio”, or “Front Ratio”. This ratio measures the borrower’s total income against the new housing payment including principal, interest, taxes and insurance (PITI). To qualify, the proposed new payment PITI cannot exceed 29% of the borrowers income.
The second DTI ratio, known as the “Bottom Ratio”, “Back Ratio” or “Total Debt”, weighs the borrowers total debt load, including the new housing payment against the borrowers total income. To qualify, the total of the borrowers new proposed monthly debt load, including housing payments, credit cards, car notes and student loans can not exceed 41% of their total documented income.
What is your debt-to-income ratio?
How to calculate your front-end DTI for a Kentucky Mortgage Loan Approval
Maximum Household Income
Since USDA loan guidelines have maximum limits set for income, borrowers must also show that they don’t make too much money to qualify. The most popular USDA loan program, Section 502 ‘Guaranteed Loans’, contains maximum income limits equal to 115% median household income for a particular area. USDA ‘Direct Loans’ for low income borrowers have lower maximum income limits than their guaranteed counterparts.
Maximum income limits vary from county to county so USDA provides a useful calculator to help figure it out: USDA Income Calculator. Calculating USDA loan income eligibility can be tricky so it’s always smart to seek an experienced USDA lender to assist you.
In review, the following income and employment guidelines must be followed for approval:
- To get an automated approved through GUS, the underwriting engine that USDA uses for the pre-approval, they typically don’t like to see the bottom ratio over 45%.
- The applicant must have a dependable two-year employment history.
- 29% Top Ratio – The new proposed housing payment with PITI may not exceed 31 percent of the applicants combined monthly income.
- 45% Bottom Ratio – The applicants proposed new monthly total debt load, including new housing payment, may not exceed 45 percent of their combined monthly income.
- The applicant’s adjustable income must be less than maximum allowed income by USDA RD for their area.
For a property to be eligible for a USDA Rural Development Loan, it must be located in an approved rural area, as defined by the USDA. The application of “Rural Area” can be quite loose and there are thousands of towns and suburbs of cities across America that are eligible for USDA financing. USDA also requires the property be Owner Occupied (OO), and it may be possible to purchase condos, planned unit developments, manufactured homes, and single family residences.
The subject property must pass an appraisal inspection by an approved appraiser to obtain USDA financing. The appraisal requirements for USDA loans are very similar to those for FHA loans. The requirements are so similar, in fact that an approved FHA appraiser will perform the USDA property appraisal.
The appraiser will make an value assessment of the property, which must meet or exceed this proposed loan amount. He or she will also look for other things about the home that could create problems such as structural issues, a leaky roof, missing paint and plumbing problems. Homes with in-ground swimming pools are not eligible for USDA home loans.
In recap, the fees charged by USDA Rural Development can be outlined as follows:
Up Front Guarantee Fee
- Upfront Guarantee Fee equals 1% of the loan amount for purchase and refinance
- Up Front Fee can be rolled into loan amount
- Annual Fee equals 0..35% of the remaining mortgage balance, which is divided by 12 and added to monthly payments.
One of the biggest advantages of USDA loans is the ability for the seller to pay all of the closing costs for the buyer (seller concessions), if properly negotiated in their purchase agreement.
What are USDA loan down payment requirements?
USDA Mortgages have no down payment requirement. Most other loan programs don’t allow this unless you are a military veteran.
How much can I can borrow?
To be eligible for Kentucky RHS USDA mortgage guidelines, it’s important to ask yourself “how much mortgage can I afford“. For starters, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (29% ratio). You must also have enough income to pay your new housing costs plus all additional monthly debt (45% ratio). Considering these requirements, maximum USDA loan limits are determined by:
Maximum loan amount: The is no set maximum loan limit for a USDA Loan. Instead, your debt-to-income ratios will dictate how much home you can afford (29/41 ratios). Additionally, your total household income must be within USDA loan guidelines and the maximum income limits for your area, which is usually 115% of area median income. Maximum USDA Loan income limits for your area can be found at here.
Maximum financing: The maximum USDA Mortgage amount will be 102% of the appraised value of the home.
What kinds of loans does USDA offer in Kentucky?
Fixed rate loans – All USDA loans are fixed-rate mortgages. In a fixed rate mortgage, your interest rate stays the same during the whole loan period, normally 30 years. They don’t offer adjustable rates, or 20, 25, 15, 10 year fixed rate loans.
Can I get a Kentucky RHS USDA loan after bankruptcy?
Criteria for Kentucky USDA loan approvals state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, you are also eligible to make a USDA Loan application.