A Kentucky USDA home loan is a zero-dollar-down mortgage option provided by USDA’s Department of Rural Development.
This government-backed loan program comes in two types: direct loan, which is reserved for lower-income households and issued by USDA, and the guaranteed loan, which is reserved for low- to moderate-income families. The guaranteed loan is funded by private lenders, and USDA guarantees a portion of the loan against default.
Is a Kentucky USDA loan more beneficial than a Kentucky conventional loan?
The KY USDA home loan program is generally more beneficial to rural families than a conventional lending program, particularly for first-time homebuyers with lower- to median-level incomes.
Some of the benefits of Kentucky Rural Housing USDA loans include:
• zero down payment
• competitive interest rates
• lower-than-average monthly mortgage insurance
• relaxed credit requirements versus conventional loans
• no loan limits
• zero down payment
• competitive interest rates
• lower-than-average monthly mortgage insurance
• relaxed credit requirements versus conventional loans
• no loan limits
How do I determine eligibility for a Kentucky Rural Housing USDA loan? To be eligible for a USDA home loan, borrowers must meet the program’s basic eligibility requirements. These requirements are relaxed compared to other mortgage options and are in place to ensure borrowers can make their monthly mortgage payments.
Here are a few of the basic Kentucky RHS USDA eligibility requirements:
• Income. Applicants must not have annual adjusted income greater than 115% of the median household income for the area. Check your county’s USDA income limit. This called compliance income.
• Employment. Applicants must have proof of two years of stable income and employment.• Credit. Applicants must have a minimum credit score of 581 to qualify for USDA’s guaranteed underwriting credit requirements. However, most lenders will want a 620 or preferably to get an Automated Approval 640 is the magic number in most cases. With regards to bankruptcy, 3 years is usually the date needed to lapse since your discharge.
: Income: They will take your gross monthly income and develop two ratios for you: The front end ratio, which is called your housing ratio, and then the back-end ratio or total debt ratio is the house payment plus the total monthly payments listed on the credit report. If you pay child support, this is included in the qualifying ratios but utility bills, car insurance, cell phone bills, water bills etc, is not included. Typically 28% is used for the housing ratio, and
Student Loans: They are pretty tough on student loans and qualifying with your current student loan debts. They will make us use 1% of your outstanding balance on student loans, so sometimes this will cause the loan to get denied because your debt to income ratio is too high. If they are in an Income-Based repayment plan they will still make us use the 1% balance so keep this in mind. For example, let’s say you owe $35k in outstanding student loans, and your IBR plan calls for a $50 monthly payment. RHS will make us use $350, not the $50 IBR payment so you can see where this will cause issue on higher debt to income ratios on some loans.
• Property location. Homes must be located within a rural area, as defined by USDA. Rural areas are any that have a population less than 35,000 depending on the area’s designation. Use this tool from USDA to determine if a specific address is eligible.
• Physical property. Homes must be the borrower’s primary residence, have direct access to a street, and have adequate utilities and water and wastewater disposal, among other things No working fams allowed or properties that income producing livestock or crops.
For those with lower incomes, a USDA direct loan provides greater opportunities for lending, as its credit and income requirements are more lax than the guaranteed loan option.
No Down Payments – USDA loans are one of the only home mortgages that allow someone to buy a home without putting any money down. In fact, the only other way someone can finance 100% of their home purchase is if they are in the military or a veteran. Even someone with perfect credit, long job history, and plenty of savings/assets cannot qualify for zero down on a home loan. This is a unique and very special aspect of USDA home buyer loans.
Property Eligibility – The home you want to finance with a USDA loan must be an eligible property. The property must be located in a rural area which is generally defined to have the following characteristics: (1) Open country; (2) Populations of 10,000 or less; and (3) Under certain conditions, towns and cities with populations between 10,000 and 25,000. The USDA makes the eligibility determination, which may be verified at the following link: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.
Job History – Similar to all other mortgage loans, a two year employment history is required. You must show that you have been consistently employed for the past two years in order to qualify for USDA financing; however in certain circumstances a small gap in employment may be permitted with a reasonable explanation. Our Loan Specialists can discuss your specific situation to see if your income is eligible. Additionally, if you have just completed schooling or military service and are newly employed but do not yet have a 2 year history, your income may also be eligible.
Income Limits – The USDA program is intended to assist low and moderate-income households, therefore to be eligible for a USDA loan, your household income may not exceed the moderate-income limits established for the specific county in which you are financing a home. Our Loan Specialists can help you determine your eligibility, or may view the eligibility requirements on this page of the USDA website:
DTI Ratio– One of the main criteria in determining if you will be approved or not is your debt-to-income ratio. While you must not make too much money, you also must not have too much debt. Your debt-to-income ratio is how much monthly debt you have (only those debts which show on your credit report are counted) compared to your qualifying income. So if your household income is $4,000/month, and your currently monthly debts (excluding rent), combined with your new mortgage payment are $1,500/month, this would equal a 37.5% DTI ratios (this was calculated by taking $1,500 and dividing it by $4,000). Generally your DTI ratio must be 41% or lower; however in certain cases, a DTI of up to 44% may be acceptable. Our Loan Specialists can help determine your qualifying ratio and discuss these options with you.
Credit Score – The minimum credit score varies from lender to lender, but most want to see at least a 620 credit score for you to be approved.
Mortgage Insurance – USDA loans have their own version of mortgage insurance. It is called the “Guaranteed Fee” and works similarly to FHA loans which have an upfront and monthly mortgage insurance premium (MIP). With USDA loans, there is a 1.00% upfront guarantee fee which may be financed on top of your loan, and a 0.35% annual guarantee fee that is divided into 12 payments each year. The amount of your annual fee (paid monthly) adjusts each year and goes down as your loan balance does. Use our USDA calculator to get an idea of what your monthly payment will be:
Kentucky Rural Housing Loans has made changes to the program guidelines for guaranteed loans, which will include the changes described below.
The 1980-D and all associated publications are replaced by the 7 CFR Part 3555. All effective Administrative Notices must reflect "3555". The new handbook is the HB-1-3555 and can be accessed by clicking the link here.
FLOOD ZONES:
Existing properties located in a flood zone are now eligible as long as flood insurance is available through FEMA's NFIP program.
New or proposed homes in a flood zone must still meet additional flood zone requirements.
Flood coverage must cover the lesser of the total loan amount or maximum allowed by NFIP.Maximum deductible is $1000 or 1% of the face amount of the policy
HAZARD INSURANCE:
Maximum deductible is $1000 or 1% of the face amount of the policy
BUILDINGS/LAND:
The subject property cannot contain any land or buildings that will be used principally for income. Minimal income producing activity is allowed (a garden, but not a farm). The value of the buildings no longer needs to be deducted from the appraised value.
RESUBMISSION POLICY:
Any request to release GUS for data updates after the issuance of a Conditional Commitment will be treated as a new request, processed in date order of applications received.
RETAINING A DWELLING:
Current homeowners are eligible for a guaranteed loan if ALL of the following are met:
Applicants are not financially responsible for another RD direct or guaranteed loan at closing.
Current home no longer meets applicants' needs.
Occupy the subject as primary residence.
Applicants are without resources or credit to obtain home.
Only one home may be retained.
Applicants must be financially qualified to own more than 1 home.
The commuting area restriction has been removed.
In order to meet the above requirement for the current home no longer meeting applicants' needs, the borrower must document a significant status change that requires immediate remedy. For example:
Severe overcrowding - Defined as more than 1.5 household members per room (not bedroom, just room)*, document overcrowding has existed for more than 90 days and will persist for 9 months into the future.
*Based on USDA's clarification of 1.5 per room, we do not anticipate many of these scenarios being acceptable and approved.
TRADELINE REQUIREMENT:
One borrower must have 3 trade lines that have existed for 12 months. If this requirement cannot be met, an accept decision must be downgraded to a refer and treated as a manual underwrite.
VERIFICATION OF RENT:
Scores 680 and above OR GUS accept = No VOR required.
Scores 679 and below = VOR required.
COLLECTIONS:
Determine if the total outstanding balance of all collections accounts and charge offs of all applicants is equal to or greater than $2,000. Unless excluded by state law, collection accounts and charge offs of a non-purchasing spouse in a community property state are included in the cumulative balance of all collections and charge offs.
Remove all medical collections and medical charge off accounts from the total balance. Medical collections and medical charge off accounts must be clearly identifiable on the credit report.
If the remaining outstanding balance of collection accounts and charge offs are equal to or greater than $2,000, any of the following actions will apply:
Payment in full of all collection accounts and charge offs at or prior to closing.
Payment arrangements are made with each creditor for each collection account and charge offs remaining outstanding. A letter from the creditor or evidence on the credit report is required to validate the payment arrangements. The agreed upon monthly payment for each outstanding collection account and charge off will be included in the borrower's debt-to-income ratio.
In the absence of a payment arrangement, the lender will utilize in the debt-to-income ratio a calculated monthly payment. For each collection and charge off utilize 5% of the outstanding balance to represent the monthly payment.
STUDENT LOANS:
Include the greater of 1% of the outstanding loan balance or the verified fixed payment reflected on the credit report.
Exception: Monthly payment amounts listed on the credit report, which are less than one percent of the outstanding balance may be used when evidence from the loan servicer is obtained indicating; 1)the applicant is on a fixed repayment plan not subject to change under the terms of the current agreement and 2) and the monthly payment amount due. Fixed payments have a monthly amount that is not subject to change through the fixed repayment time frame. Income Based Repayment (IBR) plans, graduated plans, adjustable rates, interest only and deferred plans are examples of repayment plans that are subject to change and do not qualify for the exception.
EXCLUDING INSTALLMENT PAYMENTS:
Long-term obligations with more than 10 months repayment remaining, including all installment loans, revolving charge accounts, alimony, child support or separate maintenance payments, student loans and other continuing obligations. GUS will determine if the debt can be excluded. If GUS does not exclude the debt, we cannot override it and exclude.
DEBT WITH NO PAYMENT REPORTED:
Use the greater of 5% of the balance or $10.
Current payment from current monthly statement.
TRANSCRIPTS:
All household members must have 2 years IRS tax return transcripts pulled even if they are not a borrower on the loan. Transcripts for all household members are required prior to submission to USDA for conditional commitment. If the household member(s) is not a borrower on the loan, a separate 4506T form will be required.
If any adult member of the household is not presently employed but there is a recent history of such employment, that person's income will be considered in the calculation of annual household income. If the person involved is not presently employed and does not intend to resume employment in the foreseeable future, or if interest assistance is involved, during the term of the Interest Assistance Agreement, the applicant(s) and the person involved must sign a statement to such. The statement will be filed in the permanent loan file.
GIFT FUNDS:
Household members now can provide gifts.
TAX EXEMPT INCOME:
May be grossed up 25% for repayment income, cannot be grossed up for household income.
PROPERTY:
30% land value restriction has been removed.
Cannot include income producing land or buildings that use used principally for income purposes. No reduction of value is required for outbuildings.
No active farms are commercial enterprises.
Home based operations are allowed (home daycare).
Shared Driveways and private roads must have a recorded agreement/easement.
Swimming pool restrictions have been removed. Value reduction no longer required.
ADVERSE CREDIT SEASONING:
If any of these items exist on the credit report or other documentation provided, the loan is ineligible for USDA financing with Platinum Mortgage.
Foreclosure within 3 years of application date
Chapter 7 BK within 3 years of application date
Chapter 13 BK within 12 months of application date
Late mortgage payments if any mortgage trade line during the most recent 12 months of application date shows 1 or more late payments of greater than 30 days.
Late rent payments paid 30 or more days late within the last 12 months of application date.
CREDIT SCORE:
A minimum of 2 scores required per borrower.
SELLER CONCESSIONS:
USDA has placed a limit of 6% for seller concessions.
DOCUMENT EXPIRATION:
All documents expire after 120 days for both existing and new construction.
POC ITEMS PAID BY CREDIT CARD:
If the applicant pays for application fee/closing cost/appraisal with a credit card and new charges are not reflected in the credit report balance these new charges must be included in the total balance and the payment must be recalculated. The new payment must be included in the DTI.
