The USDA provides 100% financing to qualified buyers in a rural area. What about condos, though? Is the program only for single-family homes?
Luckily, the answer is ‘no.’ You can use USDA financing on any type of property, including a condominium. The main factor is that you meet the requirements for the loan and that the property is modest for the area.
Eligibility for USDA Financing
The hardest part of USDA financing is becoming eligible for the program. It’s not a one-size-fits-all program. Only those with low enough income qualify. How do you know if you meet those requirements? Check out the requirements for your area on the USDA’s website.
In this case, you can make too much money and not qualify. However, the USDA does allow specific exceptions. They provide allowances for the following:
- $480 for every child under the age of 18 living with you
- $480 for every child over the age of 18 but attending school full-time and living with you
- $480 for every disabled person living with you
- $400 for every elderly person living with you
These allowances come directly off your gross monthly income. The USDA doesn’t decide if you are eligible or not until they determine the deductions you are eligible to receive.
Once you know your income makes you eligible, you must find a rural property. You can use the USDA’s website to determine which properties are rural. The USDA has different boundaries than many people consider rural. As long as it’s outside of the city lines and has a low enough population, it may qualify for USDA financing. You can figure out which properties qualify here.
Condos are an acceptable type of property as long as they are within the boundaries discussed above. There are certain types that do not qualify. They include:
- Condominium hotels
- Any condos where the association has pending litigation
- Any developments where the units are mostly investor owned
Qualifying for condo financing works a little differently, though; we discuss it below.
Qualifying for the USDA Loan for Condos
Qualifying for the USDA loan is different than being eligible. Once you determine you are eligible for the program, you have to prove you can afford the loan. This works the same way as many other loan programs. You must provide:
- Paystubs for the last month
- Last two years’ W-2s
- Last two years’ tax returns (if applicable)
- Bank statements
The lender will evaluate these documents and decide if they need further information. They will also pull your credit and look at your labilities.
You’ll need a minimum credit score of 640. Lenders will also look closely at your liabilities. These play a role in how well you can afford the loan.
The lender will take your total monthly debts including:
- Credit cards
- Car loans
- Student loans
You don’t have to include debts like utilities or groceries. The lender will take your minimum payments as they report on the credit report and total them.
The lender will then add the following from your potential mortgage payment:
- Real estate taxes (1/12th of the amount)
- Homeowner’s insurance (1/12th of the amount)
- Annual USDA mortgage insurance
- Homeowner’s association dues (monthly amount)
The TOTAL payment is then determined. The lender compares this to your gross monthly income and comes up with your debt ratio. The maximum USDA debt ratios are 29% on the front end (mortgage payment) and 41% on the back end (mortgage payment plus other monthly debts).
The homeowner’s association dues are the difference with condos. Single-family homes don’t usually have an association that they must pay. If they do, the charges are usually minimal and won’t affect the debt ratio much. Condos, however usually have a higher monthly payment that could make or break a loan.
Here’s an example:
You are trying to get a loan for $150,000 at a 5% interest rate. The taxes on the home are $3,000 per year and the homeowner’s insurance is $900 per year. Your mortgage insurance is 0.35% of your principal balance, so in this case, $525 per year or $43.75 per month.
Your total mortgage payment equals the principal and interest payment of $805, plus $250 taxes, $75 homeowner’s insurance, and $43.75 mortgage insurance. This equals $1,173.75.
This means you’d have to make at least $4,100 per month in order to qualify for the loan with a 29% front-end ratio.
Again, this will only work if the cost of living in your area supports income of $4,100 per month as ‘low income.’
Condos Must be Modest
One more thing you must consider is any condos you consider must be modest. The USDA program is to help low income families have a home to buy. It’s not to help those that can afford it have a luxurious condo. Technically, this means it must be modest for the area. Luxurious accommodations are not allowed.
Buying condos with USDA financing is possible. It’s a great way to get into a home with no down payment and low monthly payments. You will have to pay upfront mortgage insurance as well as a small insurance payment each month. But, if it helps you get into a home with no down payment it may be worth it.
Talk to several lenders to see what USDA options you have. Remember, you must be eligible for the program before you even think about qualifying for it, though.