USDA Financing: How Much Home Can You Afford?


If you're thinking about purchasing a new home and breaking away from the rental scene, there is no better time than now to be a first-time homebuyer. There are a few government-backed loans, such as the USDA home loan, which offers low interest rates and is tailored to first-time homebuyers. This loan also offers little to no down payment and affordable monthly mortgage payments. Before you start talking to realtors and looking for a home in a specific price range, visit your lender to lock in an interest rate and get pre-approved for a USDA government loan.

Credit Scores and Reports

USDA is a government agency that insures loans made by private lenders and banks throughout the U.S. One of the main qualifications for getting approved for any type of loan amount is your credit score. You'll need a FICO score of at least 580 or higher to qualify for the loan with a 3 percent or less down payment. If your score is lower than that, you may not qualify or may have to put at least 10 percent or more onto your down payment. Be sure that your credit report is accurate, and pay off any outstanding debt or collections before your apply for a loan.

Annual Income

A big determining factor in getting approved for an amount you'll like is your annual income. If you and your spouse are both applying together, your income will be combined. A lender can calculate your monthly income to determine how much of a mortgage payment you can afford every month. Once pre-qualified, you can use a tool like the USDA home loan rate calculator as a good starting tool to tell your realtor what your maximum home price range is.

Down Payment

Even with the average down payment for a qualifying USDA loan being around 3 percent or less, you can still offer a significant down payment at the time of closing. This will help reduce your loan obligation and help you qualify for a larger price range. In many cases, you can make a home offer with which the seller will pay all of your closing costs. This allows you to keep more money in the equity of your home or for home improvements. 

Monthly Expenses

Your lender will use a specific tool to determine how much home you can afford. This tool combines information from:

  • Your credit report findings
  • The annual percentage rate of the loan
  • FICO score results derived from all three credit bureaus
  • Your annual income
  • Miscellaneous income coming into the household
  • Outgoing existing monthly expenses
  • Your overall down payment or equity placed into the mortgage

All of these amounts will be calculated to determine your debt-to-income ratio. The lower that number, the lower your interest rate and the more house you'll be able to be approved for.

There are many things to consider when determining how much of a mortgage you can afford, including the interest rate you qualify for. Your lender will utilize their underwriting team and a USDA underwriting team to approve your loan and put you on the path to homeownership.


18 August 2016

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