Qualify for a Texas USDA Loan
If you want to buy a home in the state of Texas, a conventional mortgage might not be your best option. If the home is outside of urban areas, a USDA Rural Development loan might be more suitable for your requirements.
The Advantages of Choosing a USDA Loan
For most people, buying a home stretches their finances, but if you meet the requirements for a USDA loan, it might be easier on your budget. The USDA Rural Housing loan program was created to help home buyers in eligible rural areas, allowing lenders to offer loans to borrowers who might otherwise find it difficult to get a mortgage.
If your home is in an eligible area, the United States Department of Agriculture’s home loan program offers advantages over other types of mortgages.
No Down Payments
You don’t have to worry about saving a large down payment when you use a USDA-guaranteed loan. With other types of loans, you will be expected to find at least 3% of the purchase price for a down payment, but the USDA program doesn’t require this.
If you meet the requirements for this loan, the option of not having to save a down payment can save you thousands of dollars, and help you move into your own home without breaking the bank.
Credit Requirements
If you have had some issues with your credit, getting a home loan can be more of a challenge. The USDA program allows buyers without the best credit to qualify.
Even if you have made late payments in the past, these can be overlooked if you haven’t missed payments for a year. The underwriter can use payments to utility or cable companies as evidence to show you have a history of making payments on time.
Competitive Fixed Rates
Interest rates available on USDA-guaranteed loans are comparable to conventional or FHA loans. This means that you won’t be paying more in interest than other types of loans even when you are benefiting from the advantages offered by the USDA program.
No Private Mortgage Insurance
The USDA does not have a requirement to pay private mortgage insurance, however, they do require you to pay other fees. While this is similar to private mortgage insurance, it usually is a lot cheaper.
You could be paying more than 2% in mortgage insurance when you are approved for a conventional loan. The FHA charges an upfront fee of 1.75%, with monthly charges that could be 0.55% of the loan amount. By contrast, the USDA requires a 1% upfront fee and 0.35% of the outstanding balance annually. The 1% upfront fee can be financed or paid out of pocket at closing.
No Loan Limits
When you’re buying a home in Texas using a USDA loan, you aren’t restricted to a certain loan amount. What will restrict you is your income.
USDA loans are intended for lower and moderate-income families, and they have maximum income amounts based on the number of people living in the home. If your combined income is higher than their limits for your location, you won’t be eligible.
The USDA loan income limits are 115% of the median income in the county. For example, if you live in Colorado County (a rural area west of Houston) the income limit is $110,650 with less than 5 people in the home. When there are five people or more, the limit is $146,050. This limit is for 2024 and changes according to median income and location.
Paying Closing Costs
Even if you use the option of not paying a down payment, you still have another large upfront payment. Closing costs can be a considerable expense that is also due when you purchase your home. However, to make this easier for buyers, the USDA allows sellers to contribute to help pay these costs.
The seller can contribute as much as 6% of the purchase price to cover closing costs. If you need this help from the seller, they will have to agree and the arrangement written in the purchase contract.
If the home is appraised for more than the selling price, the closing costs can be added to the price and financed through the mortgage up to the market value of the home.
If the appraisal is at or lower than the asking price, closing costs cannot be financed into the loan.
Qualify for a USDA Loan in Texas
If you like the sound of a home loan backed by the U.S. Department of Agriculture, the most important factor for eligibility is the location in Texas.
Property Location
If you want to purchase a home using a loan backed by the USDA, the property has to be in an area they consider rural. While you might think the home isn’t in a rural area, the USDA rules allow more parts of Texas to qualify than you might expect.
If the area maintains some rural character and has a population of fewer than 10,000, it could be eligible. Even if the area is close to urban locations, the property could qualify.
If you are unsure, the USDA website has maps showing exactly the areas of Texas that aren’t eligible for their loan program. Eligible areas can change based on increasing or decreasing populations and other factors.
Property Requirements
Not only does the location of the home have to be considered, but the condition is also vitally important. The home has to meet the minimum standards set by the USDA to protect buyers. Making sure that these minimum standards are met also protects the lender, preventing them from losing money should the home foreclose.
The home also has to be considered modest for the area, without a market value above the loan limit or 80% of the local HUD limit. Homes normally have to be between 400 and 2,000 square feet. Tiny homes that are smaller than this can still be approved if they meet additional standards.
If you want to buy a home that is larger than 2,000 square feet, it can still be approved. The borrower will need to show that they require this extra space, and the cost of ownership shouldn’t be excessive.
If, for example, the home you want to buy has an in-ground swimming pool, you won’t be approved for a USDA loan even if you are going to remove it. A home with a swimming pool will be more expensive to maintain, and not exactly modest.
USDA Appraisals in Texas
To ensure that the home meets the required standards an appraiser will have to visit to assess the property. The appraiser will use quality assurance guidelines to check whether the property meets the USDA’s requirements.
The appraiser will use the HUD’s Single Family Housing Policy Handbook to assess the condition of the home. All the main parts of the home will be checked to find any issues that could cause the homeowner problems or reduce the value.
The property has to be in a good state of repair, adequate for the homeowner to live in, and structurally sound. The appraiser will create a report showing whether the home is decent, safe, and sanitary, or not. In particular, they will look at the following areas:
- Structural integrity
- Electrical systems
- Heating, ventilation, and air conditioning
- Plumbing and sewage
If the home does not meet the minimum requirements, repairs will have to be negotiated with the seller for the sale to proceed. If the seller does not agree to pay for the necessary repairs, the buyer can choose to walk away or pay for them themselves. As long as the buyer has a contingency that covers the appraisal, they can walk away with their earnest money deposit returned to them.
Approval for a USDA Loan in Texas
If the property you want to buy meets the requirements set out by the USDA, you still have to meet the requirements yourself. The mortgage program is designed for moderate and low-income families, with a combined income of no more than 115% of the area median income.
The lender will require documentation showing your income as well as your debts. Your debt-to-income ratio usually has to be no more than 41% when the mortgage payments are included. This means that your monthly debts cannot be more than 41% of your gross income.
The required credit score will depend on the lender, though they are less strict compared to conventional home loans. Better credit scores can benefit from better terms like a higher allowed debt-to-income ratio.
You can still qualify if you have been through a foreclosure, short sale, or bankruptcy, though you will have to wait. The waiting period is 3 years for foreclosure and a Chapter 7 bankruptcy, and 2 years for a short sale. For people who have gone through a Chapter 13 bankruptcy, the waiting period can be more flexible, though you might need to wait at least a year.
Summing Up Texas USDA Home Loans
For someone who isn’t buying a home in an urban area, and doesn’t have the best credit, a USDA loan is worth considering. A USDA-backed loan offers buyers competitive interest rates, more flexible credit requirements, and the option of no down payment, making it a great choice for many borrowers.
