Getting a USDA Home Loan Approval Just Got Tougher

Ever since the USDA loan program was introduced in 1949, it has been one of the most popular home loan programs, primarily due to two reasons – zero down-payment requirement and  affordable monthly insurance premiums. The year 2015, however, saw some significant changes to the USDA home loan program. In this post, we discuss the changes and how they impact prospective home buyers. Let’s take a look. 

Stringent Credit Score Requirements

The minimum credit score requirement earlier was a bit more relaxed as compared to what it is now. After the recent changes for an automated USDA home loan approval, the minimum credit score requirement is 640. However, if there are any compensating factors that hint towards a potential increase in earnings (compensating factors such as a college degree, or a job training, or more), even scores ranging between 609 and 640 might be considered for a USDA home loan approval. In such cases, the lender would do a manual underwriting of the application.

Increased USDA Guarantee Fee

The USDA Rural Housing, in the year 2015, announced the revised guarantee fee and annual fee structure for the fiscal year 2016. According to the new fee structure, applicants need to pay an increased upfront fee of 2.75 percent on the loan amount, instead of the existing 2 percent. Lenders and borrowers submitting the loan guarantee request to the USDA post 30th September 2015 are subject to the increased fee of 2.75 percent. The annual fee (monthly PMI) of 0.5 percent remains unchanged.

Reduced Debt-to-Income Ratio

According to the updated USDA debt-to-income ratio requirement, the ratio cannot exceed 29 percent, if the credit score of an applicant is 640 or less. As the approval, usually takes place through the GUS, an automated underwriting system that holds all the parameters for approval, it is impossible to bypass the new debt-to-income ratio. However, with a 680 middle credit score, the debt-to-income ratio might be relaxed, and the loan is approved by a manual underwriting where the PITI ratio is between 29 and 32 percent, or if the total debt ratio is between 41 and 45 percent.

Last Few Words

With these changes to the USDA home loan program, it has become difficult for home buyers to get a USDA home loan approval. The borrowers of home loans, whether in Texas or some other parts of the US, who are ready to pay an increased guarantee fee of 2.75 percent may still not find themselves eligible for it due to the stricter guidelines. It is, therefore, advisable to keep your debts and credit score in check to ensure you are not denied a USDA home loan due to any of these reasons.