United States Department of Agriculture loans help low-income households buy or renovate homes in rural areas. They are a loan of last resort. By virtue of USDA's underwriting criteria, the borrower must be unable to secure credit from any other source, though he himself must be sufficiently creditworthy. If a borrower does not qualify for a suitable loan amount, he can ask someone to cosign the loan.
Applicants for an USDA-backed single family housing loan must have a low or very low income, defined respectively as 50 to 80 percent of the area median income, and below 50 percent AMI subject to area income limits. The borrower must be able to afford the mortgage payments, including homeowner's insurance and property taxes, and have a reasonable credit history, yet be unable to secure credit elsewhere. Loans are for up to 38 years, typically 33. There are limits on the size, design and cost of housing that a borrower may purchase under the USDA scheme.
If the borrower's income is too low to afford the mortgage payments, he can add a cosigner to his loan application. Indeed, under USDA guidelines, the loan originator has a duty to counsel borrowers about the possibility of adding a cosigner if their qualification loan amount will not purchase a modest, decent, safe house in the area. Cosigners stand behind the borrower and help raise the borrower's loan qualification amount. They take on responsibility for the debt. They do not live in the property.
Cosigners are subject to the same credit checks as the borrower. Like the borrower, they must demonstrate a satisfactory credit history and an ability to repay the loan. USDA underwriting criteria additionally requires cosigners to show a debt-to-income ratio of 41 percent or less.
While the cosigner's income can make up the large part of the loan qualification amount, the cosigner can't replace the borrower's poor credit history with a good one of his own. If the borrower has bad debt, default judgments or tax liens he could be disqualified from USDA lending, regardless of his cosigner's eligibility.
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