USDA Loan

If you’re considering a home purchase in a rural area, you may want to explore the option of a USDA loan. With zero down payment and a variety of benefits, these government-backed mortgages are designed to help eligible buyers purchase homes in rural communities.

Let’s explore the details of USDA loans, including eligibility requirements, benefits, and the application process, to help you determine if this mortgage option is the right selection for you.

USDA Rural Development Loans

A USDA loan, sometimes referred to as a rural development loan, is a zero down payment mortgage option for eligible homebuyers who want to purchase a home in a designated rural area.

What is a USDA Loan?

A USDA loan is a type of government-backed mortgage designed to help individuals with low-to-moderate income in specific rural areas purchase a home. This loan type offers several benefits to eligible homebuyers, including no down payment and flexible credit score requirements.

How does a USDA loan work?

USDA loans are insured by the U.S. Department of Agriculture (USDA) to encourage homeownership in rural communities. While the USDA guarantees the loan, it’s provided by private lenders such as banks, credit unions, and mortgage companies. This partnership allows lenders to offer more competitive terms to qualified borrowers.

USDA Loan Requirements

To qualify for a USDA loan, you must meet certain eligibility requirements. Keep in mind, these requirements may vary depending on the lender:

Occupancy

The property you purchase must be your primary residence, meaning you must live in the home year-round. The property cannot be used for investment purposes. Eligible property types include newly constructed homes, manufactured or modular homes, condominiums, and properties in short sale or foreclosure.

USDA Loan Income Limits

While the income limits will vary depending on the specific area, your household income must be at or below 115% of the area’s median income to qualify for a USDA loan.

Location

To be eligible for a USDA loan, the property must be in a designated rural area. To find a property in a USDA-approved area, you can use USDA’s Property Eligibility tool, which is featured on their website.

Debt To Income Ratio

Lenders typically prefer borrowers with a debt-to-income (DTI) ratio below 41%. This means your monthly debt payments, including your potential mortgage, should not exceed 41% of your gross income.

Credit Score

While the USDA does not mandate a minimum credit score, most lenders require a credit score of 640 or higher.

USDA Appraisal

Every USDA-guaranteed loan requires an appraisal. The appraiser will ensure the property meets USDA standards and will determine the property’s fair market value based on recently sold comparable properties in your area.

Types of USDA loans

The USDA offers several loan programs to help people purchase or improve homes in rural areas. Here’s a quick guide to the main types:

USDA Guaranteed Loans

The USDA Guaranteed Loan, also known as the Section 502 Guaranteed Loan Program, allows approved mortgage lenders to offer 100% financing to borrowers in designated rural areas. The loan is considered “guaranteed” because the USDA will reimburse up to 90% of the loan to lenders if the borrower fails to make payments.

USDA Direct Loans

USDA Direct Loans are government-backed mortgages available to very low-income and low-income individuals and families in eligible rural areas. These loans often feature low-interest rates and may include payment assistance to help borrowers afford their mortgage. Unlike Guaranteed Loans, Direct Loans are processed through USDA Rural Development offices rather than private lenders.

USDA Renovation Loans

The USDA Repair Loan program, also known as Section 504 Home Repair, provides financial assistance to low-income homeowners for necessary home repairs or improvements. Loans are available up to $40,000. Additionally, very low-income homeowners aged 62 or older may qualify for grants of up to $10,000 to address health and safety hazards.

USDA Loan Benefits

A USDA Loan offers eligible borrowers a variety of benefits. Here are the main advantages:

  • No Down Payment Required: One of the biggest advantages of a USDA loan is the ability to buy a home without a down payment.
  • No Prepayment Penalties: Homeowners have the flexibility to pay off their USDA mortgage early without incurring any financial penalties.
  • Competitive Interest Rates: USDA loans tend to offer competitive interest rates, which could result in significant savings over the life of the loan.
  • Lower mortgage insurance cost: While USDA loans do require mortgage insurance, the costs are generally lower compared to conventional loans. The upfront fee is 1% of the loan amount, followed by an annual premium of 0.35% of the remaining balance.
  • Closing cost flexibility: Sellers and lender credits can contribute to the buyer’s closing costs, reducing the upfront cash needed at closing for the buyer.

usda rural development loan

 

 

USDA Loan Disadvantages

While USDA loans offer many benefits, it’s essential to consider the potential drawbacks as well.

  • Location Restrictions: To qualify for a USDA loan, the property must be in a USDA-approved rural area, which limits eligible locations for potential buyers.
  • Income Restrictions: Borrowers must have a household income at or below 115% of the area’s median income to qualify for a USDA loan.
  • No Adjustable-Rate Mortgage: USDA loans are only available with fixed interest rates, meaning adjustable-rate mortgage options are not available.
  • Lifetime Mortgage Insurance: Although USDA loans feature lower mortgage insurance premiums, these premiums must be paid for the life of the loan.

Who should consider a USDA Loan?

Here are some situations when you might consider getting a USDA loan:

  • You’re looking to buy a home in a rural area: USDA loans are only available for properties located in eligible rural areas. If you’re looking to buy a home in a rural area and meet the income and credit requirements, a USDA loan could be a great option.
  • You have a lower-to-moderate income: USDA loans are designed to help low- and moderate-income borrowers. If your income falls below the limit for your area, you may be eligible for a USDA loan.
  • You want to buy a home with no down payment: USDA loans offer 100% financing, which means you can buy a home without making a down payment. This could be a huge advantage, especially for first-time homebuyers who may not have a lot of money saved up.
  • You have a less-than-perfect credit score: USDA loans have more lenient credit requirements than conventional loans. If you have a lower credit score, a USDA loan may be a good option.

USDA Home Loan Rates

USDA home loans often come with lower, fixed interest rates compared to conventional mortgages. This is because the government guarantees these loans, reducing the risk for lenders and allowing them to offer more competitive terms. However, your individual interest rate will still depend on factors such as your credit score and overall financial situation.

How much does it cost to get a USDA Rural Development Loan?

USDA Rural Development loans have various costs that depend on factors such as the loan amount, property location, and interest rates. Like other mortgage loans, borrowers should anticipate closing costs, typically ranging from 2% to 6% of the home’s purchase price. However, these costs can often be negotiated or covered by the seller.

In addition to closing costs, USDA loans have an upfront guarantee fee of 1% of the loan amount, as well as an annual mortgage insurance premium of 0.35% of the remaining balance. To get an accurate estimate of the total costs for your specific situation, it’s best to speak with a Loan Officer.

Should you get a USDA loan?

There are various home loan options available, with some even offering no down payment. It’s essential to explore all your options before deciding if a USDA loan is the right choice for you. Speak with a Loan Officer to learn more about our other zero-down payment options, including FHA 100% Financing and VA Loans.

How can I find USDA lenders near me?

Direct Mortgage Loans is a USDA lender that can help you determine if this option is a good fit for your financial goals. Our expert Loan Officers can guide you through the process and answer any questions you may have. Furthermore, if you’re interested in a USDA Direct Loan, you can also use their website to find a Local Service Center.

How To Apply for A USDA Loan

To apply for a USDA loan, first speak with a Loan Officer to confirm your eligibility. Once you’ve confirmed your eligibility, gather the necessary financial documents and submit your mortgage application. Your lender will review your information and assist you through the loan process, which includes property appraisal, underwriting, and closing.

Apply For A USDA Loan