USDA Loans: What you need to know
USDA home loans provide competitively priced mortgages for low-income people living in rural areas. To avail the details about USDA loans, check out the posts below.
What is a USDA loan?
Low-income individuals living in rural areas may qualify for a USDA home loan, which is a competitively priced mortgage option. In the same way that the Department of Veterans Affairs backs VA loans for eligible individuals such as veterans and their families, the US Department of Agriculture backs USDA loans.
Due to this government backing, mortgage lenders can often offer lower interest rates than conventional lenders. With the right qualifications, you may be able to buy a home with no down payment. However, closing costs still apply.
USDA offers three different mortgage programs:
- USDA Direct loans: For low-income borrowers qualifying for these loans, the USDA offers low-interest loans as low as 1%.
- USDA Loan guarantees: These loans are issued by participating lenders and require minimal down payments and low-interest rates.
- USDA Home improvement loans: Homeowners qualified for these loans can use the money to improve their homes.
How USDA loan programs work?
A USDA section 502 loan falls into two main categories: guaranteed loans for single-family homes, and direct loans for single-family homes.
- Single-Family Housing Direct Home Loans: Applicants with low income and very low income are eligible for mortgage payment assistance through these loans. Rural properties must be located in eligible areas, and income requirements depend on where the borrower lives. A qualified borrower could reach a repayment period of 38 years, although it could be as long as 33 years for others.
- Section 502 Guaranteed Rural Housing Loan: In this program, applicants with low and moderate incomes can receive 100% financing on their homes with no down payment necessary. This type of loan can only be repaid over a 30-year fixed-rate period. To qualify for a guaranteed loan, applicants must meet income requirements, and the property must be located in an eligible rural area.
Mortgage insurance is not required for either loan. The lender instead pays a guarantee fee to the USDA and then recoups the fee from the monthly mortgage payment.
Types of USDA loans
There are three USDA home loan programs:
- Loan guarantees: USDA-backed loans are similar to FHA loans and VA-backed loans because they allow you to get low mortgage rates even without a down payment. In that case, a mortgage insurance premium will have to be paid.
- Direct loans: The USDA offers low- and very-low-income mortgages. Qualifications vary by region. Subsidies can reduce interest rates to 1%.
- Home improvement loans and grants: Homeowners may use these loans or outright financial awards to repair or upgrade their properties. Additionally, loans and grants may be combined to provide assistance of up to $27,500.
USDA Loan Requirements
The USDA’s basic eligibility requirements, which are based on credit, income, property use, and location, must be met by applicants before they are eligible for a USDA loan.
Every one of these factors contributes to the USDA’s mission of providing safe and sanitary housing for low- and moderate-income families.
USDA guidelines require at a minimum:
- Citizenship or legal permanent residency in the United States (including non-citizens and qualified aliens).
- A credit score of at least 640 is typically required to demonstrate creditworthiness
- Having a stable and reliable income
- In general, mortgage loans should not be late or collected for 12 months before they are repaid
- A household’s adjusted income is equal to or less than 115% of the area’s median income
- In addition to serving as the primary residence, the property is located in a rural area
USDA Loan Limits 2022
In most counties in the United States, the income limit for a USDA loan is $91,900 for a household with 1-4 members or $121,300 for a household with 5-8 members. If you are considering a USDA home loan, your household income should not exceed these limits, but income limits can vary by region due to the cost of living.
For all counties in the United States, income limits for the Single-Family Housing Guaranteed Loan Program have increased. For 1-4 person households, the standard income limit previously was $90,300, and for 5-8 person households, it was $119,200.
Benefits of USDA Home Loans
Zero Down Payment: USDA loans do not require borrowers to pay a down payment. It is often difficult for people looking to purchase a home to come up with a large down payment.
Low credit score: There is no minimum credit score requirement for USDA loans. You must, however, demonstrate your ability and willingness to repay the loan.
Flawed credit history can still be OK: Low credit scores usually reflect poor credit histories, which can deter mortgage lenders from offering conventional loans. To determine whether a borrower qualifies for a USDA loan, however, the USDA uses its Guaranteed Underwriting System. To help borrowers as much as possible, there is more flexibility in the way qualifications are reviewed.
Low origination fee: USDA loans come with a guarantee fee of 2% of the loan amount. The fee can, however, be rolled into the mortgage loan amount rather than paid upfront.
Rates: In general, USDA loan rates are lower than conventional or FHA loan rates. The good news is that borrowers with low credit scores can still obtain those low rates as borrowers with great credit scores.
Streamlined refinancing process: Using the USDA’s streamlined assistance refinance loan program, homeowners can refinance their mortgage in as little as three weeks. You do not need credit reports, a home appraisal, or an inspection of the property.
USDA Home Loan Advantages
No Down Payment!
One of the most important benefits of using a USDA loan is the fact that it offers 100% financing. First-time buyers and repeat buyers are both eligible for this loan program, but for many first-time buyers, securing a down payment is their biggest hurdle.
Lower-Than-Market Interest Rate
The USDA ensures USDA loans, so homebuyers can take advantage of a low, across-the-board interest rate regardless of their credit score or down payment. In contrast to conventional financing, interest rates are based on the market and the borrower’s credit score.
Low Monthly Private Mortgage Insurance (PMI)
No matter the loan program, private mortgage insurance is required for any loan with a down payment of less than 20%. This includes USDA loans as well. The USDA loan’s private mortgage insurance rate is the lowest of any loan program and won’t change based on your down payment, as it does with conventional financing. A USDA loan currently has an annual PMI fee of 0.35%.
Flexible Credit Guidelines
USDA loans allow borrowers with limited or blemished credit histories to qualify for home loans. Rent, utilities, cell phone bills, etc. may be used as proof of willingness to repay debts by those with no credit or non-traditional credit.
USDA Rural Development
USDA Rural Development helps improve the economy and quality of life in rural America.
Rural Americans benefit from many of its programs.
In addition, it provides loans, grants, and loan guarantees to help create jobs and support economic development and essential services such as housing, health care, first responder equipment, and water, electrical, and communications infrastructure.
It facilitates economic development by providing loans to businesses through banks, credit unions, and community-controlled lending pools. They provide agricultural producers and cooperatives with technical assistance and information to help them get started and improve their operations. In order to empower communities, it offers technical assistance.
It aims to help rural residents find safe, affordable housing and make home repairs for their safety and health.
Rural Housing Loans
To encourage homeownership in less-dense communities, the Rural Development loans are 100% financed home loans insured by the U.S. Department of Agriculture. You may be able to use it if this is your first home or if you are having trouble saving for a down payment. Aside from the VA loan, it’s one of the few loans that don’t require a down payment in cash upfront.
As part of the USDA’s eligibility criteria, the home must be located in a rural or less-populated area. These often include villages, small towns, and suburbs near larger cities, as well as surprising places.
USDA Mortgage Insurance
In the USDA’s home loans program, low-income rural residents who can’t otherwise obtain a conventional mortgage are offered mortgages. USDA direct loans or USDA guaranteed loans may be available to rural residents who are unable to qualify for conventional loans.
How to apply for a USDA loan
USDA loans provide low- and middle-income consumers in communities throughout the country with access to homeownership.
Federal government-backed loans allow qualified buyers to purchase with no down payment. The interest rates are also competitive and mortgage insurance is affordable.
USDA loan applications can be submitted online or in person. Following are the steps for how to apply for a USDA loan:
- Find a USDA lender to prequalify
- Obtain pre approval
- Locate a USDA-eligible home
- You must sign a purchase agreement
- Approval from Underwriting
- Receive final USDA loan approval (a.k.a. “the clear-to-close”).
- Your new home is now yours!