If you're looking to buy a home in California but are worried about the upfront costs, the USDA Home Loan Program could be a game changer. Offering 100% financing and requiring no down payment, this program is an excellent option for many buyers, especially those in rural and suburban areas of the state. In this post, we’ll discuss how to get a USDA loan, who qualifies for it, and where the USDA-approved areas in California are located.
The USDA Home Loan Program, backed by the U.S. Department of Agriculture, is designed to make homeownership more accessible for low- to moderate-income buyers, particularly those living in rural and suburban areas. Unlike many other loan programs, the USDA loan offers 100% financing, which means no down payment is required, making it an ideal choice for first-time buyers and those with limited savings.
This loan is available for purchases and refinances but is primarily used for buying homes in eligible areas. The program’s focus is to promote homeownership in areas that are less populated, while still offering all the benefits of traditional financing.
To qualify for a USDA loan in California, there are a few key eligibility requirements related to income, location, and creditworthiness. These factors ensure that the program is helping the people who need it the most — those with moderate incomes looking to settle in rural or suburban locations.
The first requirement for a USDA loan is that the property you want to purchase must be located in an approved lending area. While major metropolitan areas like Los Angeles, San Francisco, and San Diego are not eligible, many surrounding areas qualify. USDA loans are typically available in rural or suburban areas.
To determine whether a property is in an eligible area, you can use the USDA property eligibility tool. This tool allows you to enter an address or zip code and check if it falls within a USDA-approved area. For example, areas like Yucca Valley, Palo Cedro, Tehachapi, and Hemet are eligible, while cities like Sacramento and Santa Barbara are not.
Who Qualifies for the USDA Loan in California
USDA loans have income limits based on the number of people in your household and the area in which you are buying. The income limits can vary by county, so it's important to check the limits for the area you're interested in. Generally, these limits are set to ensure that the program benefits those who are considered low- to moderate-income households.
Here are some general income guidelines for California:
These income limits are updated periodically, so be sure to check current figures for the specific area you're looking at.
While the USDA does not have a specific minimum credit score requirement, most lenders typically require a credit score of at least 620. Some lenders may have stricter credit score requirements, especially if you have a less-than-ideal credit history. It's important to check with a USDA-approved lender to understand their specific credit score requirements.
If your credit score is below the required threshold, some lenders may still be willing to work with you. However, you may need to show that you have strong financial habits, such as consistent income and low debt.
The USDA has debt-to-income (DTI) ratio requirements that help determine whether you can comfortably afford the mortgage. This ratio compares your monthly debt payments (including the mortgage) to your gross monthly income.
For most borrowers, the USDA limits the front-end DTI ratio (the portion of income that goes toward the mortgage) to 29%, and the back-end DTI ratio (which includes other debts such as car loans, credit card payments, and student loans) to 41%. However, if your credit score is above 680, you may be able to exceed these limits slightly (up to 32% front-end and 44% back-end).
The USDA loan is designed specifically for primary residences. This means you cannot use the loan to purchase a second home, vacation property, or investment property. The property you purchase must be your primary residence, and you must live in it for the majority of the year.
USDA Loan in California
As mentioned, USDA loans are only available for properties in approved areas, which are typically outside major urban centers. However, there are still many eligible areas across California. Here are a few examples of USDA-approved areas in the state:
Other eligible areas include parts of Fresno, Bakersfield, and Paso Robles, as well as rural communities in Inyo County and Madera County.
It's essential to use the USDA property eligibility tool to confirm the specific area, as eligibility can change over time based on census data and rural development needs.
Now that you know the basic eligibility requirements, let’s discuss how to apply for a USDA loan in California:
Find an Approved Lender: Not all lenders offer USDA loans, so you will need to find a lender that is authorized to offer USDA financing. Many banks, credit unions, and mortgage brokers are USDA-approved.
Check Property Eligibility: Use the USDA eligibility tool to confirm that the property you're interested in is within an approved lending area. If the property is eligible, proceed with the application process.
Submit Your Application: You will need to submit your financial information to the lender, including details about your income, credit history, debts, and assets. The lender will assess your eligibility based on these factors and the USDA guidelines.
Get Pre-Approved: Once your application is reviewed, the lender will issue a pre-approval letter, which shows that you qualify for a USDA loan. This is an important step before you start shopping for homes.
Find Your Home: Once you have pre-approval, you can begin looking for a home in an eligible area. Work with a trusted realtor who is familiar with USDA loan requirements to help you find a property that meets the program's criteria.
Close the Loan: After your offer is accepted, the lender will process your loan and conduct an appraisal to ensure that the property meets USDA standards. Once everything is finalized, you will close on the loan and become a homeowner with 100% financing.
If you’re interested in applying for a USDA loan in California, Nathan Rufty, a licensed mortgage professional at Canopy Mortgage, is here to help. With over 20 years of experience in the lending industry, Nathan is dedicated to providing exceptional customer service and helping you navigate the process of securing the best loan for your needs.
Call Nathan directly at 909-503-5600 to discuss how the USDA loan program can work for you and to get started on your path to homeownership.
By taking advantage of the USDA Home Loan Program, you can secure a home in California with no money down, saving you thousands in upfront costs. Reach out to Nathan Rufty today to explore your USDA loan options and make your dream of homeownership a reality!