USDA home loan People associate USDA or the U.S. Department of Agriculture with things like food safety, food pyramid and plant inspection however do you know USDA is also involved with home ownership and home development in rural America? USDA assists low-income families in rural America so that they can become homeowners and leaders in quality standards of living.
USDA home loans are one of the best options available for rural homeowners to finance the purchase of a new home. However, their eligibility requirements and attributes make them different from other home loan types. Still if you wish to obtain a USDA home loan to fulfill your homeownership dream then you can take advantage of big perks and opportunities. This guide will provide an overview of USDA home loans, the eligibility criteria, the application procedure and other pertaining details.
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Highlights of this Post
What Is The USDA Home Loan Program?
USDA aims to strengthen the nation’s economy, to help home buyers buy rural houses and become homeowners, and to improve the quality of life in suburban areas. The USDA Program is designed to provide families with safe, clean, and friendly properties.
They also offer loans for home renovations, remodeling, retrofits, improving efficiency, and starting new property construction. According to the USDA Program’s website, more than one million families – roughly four million Americans – have moved to small towns since 2009. This raises the value of these properties and encourages community growth.
What Are The Eligibility Criteria To Qualify For USDA Home Loan Programs?
It is important to note that every USDA home loan program differs from one another. You must meet the income, property and credit score requirements to qualify for a home loan and grants program sponsored by USDA. Let’s take a look at the following eligibility criteria to qualify for a USDA home loan or grants program.
Meet The Citizenship And Residency Criteria
The first and foremost eligibility criteria is to be a citizen of the United States or a lawful resident of a state from where you are applying for USDA home loan programs.
Meet The Income Criteria
USDA Guaranteed Home Loan Program is geared particularly towards low or moderate-income home buyers in rural America. This is the reason why applicants must not earn income more than the specified threshold.
The income limitation of USDA home loan programs may vary depending on your household size and metro area. For instance, the income ceiling will be higher in some expensive areas in America. Before applying for a program you can check the income limitation for your household size and county with the property eligibility tool available on the official website of USDA.
Meet The Property Criteria
One of the easiest ways to find out if your properties are in USDA-eligible areas or not is to check the official website of USDA. The properties purchased with the help of USDA-approved loans must be located in qualified rural areas in America.
USDA mortgages are available to homeowners situated in rural areas only as a part of the federal government initiative to promote rural economic growth and homeownership.
Following is the list of property feature requirements that you need to fulfill.
- Structurally sound
- Must be an existing or new construction
- Should have a maximum of 2000 square footage
- Must not be designed for income-producing activities
- Should not have an inground swimming pool
- Should have water and wastewater disposal system in good repair or must be repaired with loan funds
- Should pass the inspection by a state-licensed inspector.
Meet The Credit Score Criteria
There is no credit score requirement imposed by the Department of Agriculture for all borrowers since USDA-approved lenders generally look for a credit score of 640 among applicants before approving their loan application.
Borrowers who have no credit history will be evaluated by USDA through alternative eligibility criteria. Also, the monthly payment on the USDA loan including the principal, insurance, interest and taxes must be 29% or less of the monthly income of the borrower. The monthly debt payments also must not exceed 41% of the home borrower’s income.
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How To Apply For USDA Home Loan?
Verify The Eligibility Criteria
You need to fulfill the eligibility criteria set by USDA to qualify for a home loan. You can consult USDA income and property eligibility maps.
Decide The Type Of Loan To Avail
If you think you can meet the set parameters then decide whether you should go for a guaranteed or direct home loan by USDA. Guaranteed loans have higher income limits and you need to apply for guaranteed loans through a USDA approved lender. On the other hand, direct USDA loans are reserved for low-income borrowers who do not have access to safe and secure housing.
Complete The Application
When you’re ready to apply, submit the application and paperwork about your finances including details about your assets, income, and debt and undergo a credit check procedure. If you are pre-approved then you can search for a home in an eligible rural area based on USDA eligibility criteria.
Pay USDA Loan Fees
Once you qualify for a USDA home loan it is important to make an annual fee and an upfront guarantee fee.
- The Upfront USDA guarantee fee is 1% of the loan amount for instance if you are taking a $100,000 loan then the upfront guarantee fee will be $1000 that will be enrolled into your mortgage and you do not have to pay it out of your pocket.
- The Annual USDA fee is around 135% of the home loan amount. For instance, if you’re taking a $100,000 mortgage then you have to pay one one-time upfront guarantee fee of $1000 and an ongoing payment every year of $350 for the life of the loan.
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How To Qualify For The Best USDA Home Loan Rates?
One of the best ways to improve your odds of qualifying for the best USDA home loan rates is to get your finances in order. Following are the ways in which you can strengthen your financial position.
Make Down Payment
USDA loans do not require any down payment however putting some money down will show the USDA-approved lender that you are serious about repaying your home loan program as agreed.
Work On Your Credit Score
The higher your credit score the better will be your chance to get the best USDA home loan interest rates. It is important to take steps to improve your credit score before applying for USDA loans
Manage Current Debt
Home buyers can be in debt to reduce their debt-to-income ratio to be approved for a USDA home loan. This will also show that you have adequate funds to pay back your home loan.
It is necessary to shop around to compare interest rates, closing costs, fees and loan terms with several lenders to get the best deal possible. A lot of first-time home buyers can get the best deal from other sources as well.
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What Documentation Are Required To Qualify For USDA Home Loans?
Applicants who want to qualify for USDA home loans have to prove their income by providing the USDA-approved lender with the following official documents.
- Pay stubs
- Statements of bank and investment accounts
- Social Security payments
- Tax statements such as W2, 1099s or 1040s
- Child support and alimony payments.
- Veteran Administration statement of benefits
- Recent income statement from your employer
- Social Security statement of benefits
- Last year’s federal, state or tribal tax return
- Unemployment or Workmen’s Compensation Statement of benefit
- Retirement or Pension Statement of benefits.
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Proof Of Identity And Age
Applicants have to provide valid documents to verify their identity, address and age during the application procedure. Following are the accepted documents that you have to submit.
- Birth certificate
- US driver’s license
- Valid military, government or state ID utility bill
- Recent W2 forms
- Permanent residence card
- Certificate of US citizenship
- Social Security card.
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What Are The Pros And Cons Of Obtaining USDA Home Loans?
Home buyers need to weigh both the pros and cons of availing USDA home loans before applying. The primary benefit of obtaining a USDA home loan is that there is no requirement to make a down payment and this makes it an excellent program for buyers who are on a tight budget but flexible about where they live.
The only drawback of obtaining USDA home loans is that you have to fulfill restrictions on the area where you can purchase a property and have to meet stringent income requirements. Let’s take a look at the following pros and cons of obtaining USDA home loans.
- No such down payment requirements
- The closing costs can be paid by the seller
- No formal loan limitation for USDA-guaranteed loans
- Fixed and low-interest rates for USDA direct loans
- The home loans are available for refinancing as well as for purchasing a new property.
- Should use the property for primary residence only
- Must meet the guidelines around where the home should be located
- Limited income criteria
- Have to pay upfront and annual fees.
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What Are The Different Types Of USDA Home Loans?
There are multiple types of USDA loans available that cater to different types of home buyers and each has its own sets of eligibility requirements and application procedure. Let’s see the various types of USDA home loans and how they can help you.
USDA Direct Loans also known as Section 502 loans provide low-rate home loans for homeowners living in rural areas in America and in desperate need of adequate housing. This loan is different from USDA-guaranteed loans since you can apply for the loan directly through the USDA Rural Development Service Centers.
The loans are available to low or very low-income households. Obtaining direct loans also pose a limit on the amount of money you can borrow based on the county where your home is situated.
Officially known as the Section 502 Guaranteed Loan, the USDA Guaranteed Home Loan Program enables approved mortgage lenders to offer 30-year fixed-rate home loans to borrowers located in eligible USDA locations.
Section 502 Guaranteed loans by the US Department of Agriculture guarantees nearly 90% of the home loan to approved lenders in the event individuals become a defaulter on their mortgage.
To get an opportunity to purchase a home in an USDA-eligible area you also have to meet the income requirements that state individuals to have income less than 115% of the area’s median household income.
The USDA Home Repair Loans And Grants Program is popularly known as the Section 504 Home Repair Program and is somewhat similar to the Direct Program that is geared towards low-income individuals living in eligible rural America.
This program is somewhat different as it offers loans up to $20,000 and then allows rural homeowners to repair or improve their homes. Besides, it also provides grants to low-income homeowners who are 62 years or above in age to remove safety or health hazards from their home. The grants are capped at $7500.
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How Do USDA Loans Differ From Conventional Loans?
USDA home loans and conventional loan programs are two types of mortgages that you can obtain to finance the purchase of a new home. Conventional is a type of mortgage loan that is not backed by the government and is different from other nonconforming loans like VA and FHA mortgages.
Borrowers have to pay back the loan amount in the same way for instance monthly payments along with interest. However, USDA loans are different from conventional loans in the following ways.
Various factors determine the interest rate on a mortgage including your loan term, credit history and the economy.
Generally, the interest rate for USDA direct loans is 4.75% whereas interest rate for USDA guaranteed loans may vary depending on the lender. The average interest rate for a USDA-guaranteed loan is 6.60%. The current interest rate for a conventional 30-year fixed rate is supposed to be 7.29%.
One of the biggest hurdles for borrowers on a tight budget is to come up with adequate cash to close on a home or pay for a down payment and closing costs. With a conventional loan, you have to make a minimum 20% down payment towards the purchase of your new home.
Two types of home loans provide 0 down financing for qualified borrowers: VA and USDA loans. If you don’t meet the military service guidelines of the Veteran Administration loan then you can qualify for a USDA loan and save money for a down payment and closing costs.
Conventional and USDA loans both require appraisal by a third party before getting approval; however there is a significant difference between the two loans. The appraisal for a conventional loan ensures the loan amount is right for the home value.
Appraisal for a USDA home loan is like an appraisal for a conventional loan that checks if the value of the home is right for the loan amount. USDA loans make sure the condition of the property meets the quality USDA standards for instance basic livable condition and things like a heating system, and roof that are up to the code.
USDA loans come with annual guaranteed fees and upfront fee payments. The guaranteed fees work similarly to any mortgage insurance and are used towards funding the home loan program. This annual fee will be added to your monthly home loan payment and will last throughout the life of the loan.
With a conventional loan when you put 20% down you do not have to pay any private mortgage insurance. Private mortgage insurance refers to a small down payment that is added to your monthly mortgage unless you pay 20% of the amount of your loan.
USDA guaranteed loans have fixed rate 30-year loan terms. On the other hand, USDA direct loan borrowers have a minimum of 33 years to repay their loans to USDA.
Extremely low-income borrowers have extended periods to repay their loans for instance up to 38 years to repay their loans which makes availing USDA loans affordable. The loan terms of USDA are more flexible compared to conventional loans.
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Which Lenders Provide USDA Home Loans?
Hundreds of mortgage lenders provide USDA home loans. There is a compiled list of lenders made by the USDA Rural Housing Service that approves loans under the single-family housing guaranteed loan program.
- All types of lenders and banks provide USDA loans
- Local credit unions including large national retail banks provide USDA loans
- Small mortgage bankers and mortgage brokers also offered USDA home loans
Small mortgage lenders and big national banks such as Wells Fargo and JP Morgan Chase provide USDA mortgages. It is important to work with a loan officer who is well-versed with USDA home loans and eligibility criteria.
The US Department of Agriculture not only supports food programs and farming businesses but also runs a substantial home loan initiative that provides mortgage financing with zero money down. USDA home loans are one of the best options to consider for homeowners on a tight budget who want to make the purchase of a home affordable and wish to live in a qualifying rural area in America. Even though you have to pay closing costs you will get a lower interest rate and are not required to pay any down payment. It is important to do a preliminary check on the official USDA eligibility site to see if you can get a home in an area you are interested in and whether you qualify for the home loan program.
Frequently Asked Questions
Are USDA Home Loans A Good Option To Consider?
Borrowers who are confident they can meet the minimum income criteria of USDA and wish to live in an approved rural area can consider obtaining a USDA home loan to fulfill their home ownership dream. Alternatively, they can also explore FHA loans from lenders that work with low-income borrowers.
Can I Use USDA Home Loans To Refinance My Existing Mortgage?
Yes, you can refinance your existing USDA mortgage with another USDA mortgage or refinance an existing USDA mortgage into a conventional mortgage. It is important to note that you can’t refinance a non-USDA mortgage into a USDA mortgage. There are three options for refinancing if you have a USDA loan: USDA non-streamline, USDA streamline and conventional loan refinance.
Is There Any Private Mortgage Insurance Required To Obtain USDA Home Loans?
There is no requirement for private mortgage insurance on USDA home loans since PMIS are required only for conventional loan borrowers and they have to put less than 20% of the home purchase price towards a down payment. USDA loans charge an upfront guarantee fee of 1% of the loan amount and an annual fee of around 0.35% of the loan amount instead of charging mortgage insurance.
Are There Any Limits On The Loan Amount For USDA Home Loans?
There are loan limitations set by USDA that may differ as per your county and the highest loan amount is $377,600 in most counties. For instance, in expensive areas like Santa Cruz County in California, the limitation can exceed up to $970800. Apart from loan limitation you also have to meet the income criteria that may differ based on which country you are living.