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Guide to USDA Loans

photo of a home | USDA loan USDA home loans are made possible by the U.S. Department of Agriculture. USDA loans are for home buyers in eligible rural areas of the country and are intended to help promote homeownership in those areas. That’s why this type of loan is also known as the USDA Rural Development Loan (RD Loan). But don’t get the wrong idea about USDA loans, you don’t need to buy a farm or live in a rural area. Many USDA properties are in suburbs just outside of densely populated cities.

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How Do USDA Loans Work?

USDA eligibility involves certain locations and income levels, so applying for this loan means the applicant, household and the property will need to meet certain requirements. USDA loans are issued by a participating mortgage lender and are guaranteed by USDA, similar to VA loans and FHA loansso you can obtain a lower interest loan without a down payment.

In general, USDA home loans are for those low to middle income earners whose income is no more than 115% of the area’s median income, based on the household size, and location.

For those who may not be able to afford a traditional mortgage, USDA loans are often a great way to afford the home you want.

Steps to Obtain a USDA Loan:

  1. Get preapproved for a mortgage by contacting a lender.
  2. Verify eligibility by checking USDA applicant requirements. A lender can also help with this.
  3. Find a home you want to purchase.
  4. Meet USDA credit qualifying and income eligibility requirements.
  5. Verify the property meets USDA eligibility guidelines.
  6. Lender adds the property details to the loan file and submits to USDA for final sign-off.
  7. Lender closes the loan.
  8. Move in!

USDA Loan Benefits

  • No down payment required
  • More flexible credit score requirements (as low as 580 with New American Funding) or 0 if applicant has no traditional credit but has access to nontraditional credit references
  • USDA offers 100% financing for qualified borrowers
  • Funds can be used to make accommodations for a household member with a physical disability
  • When the value of the home exceeds the purchase price, borrowers may finance many things in the loan amount, such has appliances, home repairs (roof, windows, heating/air, etc.) as well as any necessary accommodations for disabled household members
  • Helps those who can't qualify for a conventional loan become homeowners
  • No minimum or maximum loan limits

Like FHA loans, the requirements for a down payment to obtain a USDA loan are quite flexible.  Further, there is an initial and monthly fee as with FHA loans, however a USDA loan does not require mortgage insurance, saving you money.

It should be noted also that while FHA loans are not limited by the location of the house, USDA loans are typically offered to those in rural or semi-rural areas of the country.  You can look at the Property Eligibility map to verify which areas are eligible for USDA loans.

The loan limit can vary widely depending on the state and region: loans can be as much as a half-million dollars in more expensive markets such as California, or around $100,000 in more rural sections of the country.

USDA Eligibility

Applicants/household must meet income limit guidelines for USDA eligibility:

  • Borrowers must occupy the dwelling as their primary residence
  • Applicants must be a U.S. Citizen, U.S. non-citizen national or Qualified Alien
  • Property must be in an eligible area
  • The monthly payment (principal, interest, insurance, and taxes) cannot exceed 29% of your monthly income
  • You must have a reliable source of income, usually at least 24 months’ worth on hand
  • Strong credit history—no accounts moved to collections in the last 12 months

 

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USDA Home Loan Options

  • Single family direct home loan
  • Single family guaranteed loan
  • Rural repair and rehabilitation loan
  • Mutual self-help loan

Single Family Direct Home USDA Loan

This USDA loan assists low-income individuals purchase, repair, or renovate homes in more rural areas. 

The life of the loan depends on the income:

  • Up to 33 years for applicants with incomes of more than 60% of the average median income for the region
  • Up to 38 years for borrowers with less income
  • Up to 30 years for those purchasing a mobile home or some other home which was mostly made in a factory

You need to have a household income of under 80 percent of the median income for the area to qualify, in addition to being able to afford the monthly payments.  The home’s market value must also be reasonable.

Single Family Guaranteed Housing USDA Loan

For those of modest income, this loan type can help them obtain a home loan so long as their income is not more than 115% of the median income for the area.  Such loans are for 30 years with variable interest rates.

Rural Repair & Rehabilitation Loans

This loan is a way of obtaining the means to repair and otherwise improve a home to rid it of safety hazards or make it more sanitary.  Your income needs to be under 50% of the area’s median income and be otherwise unable to obtain the needed credit elsewhere.

Mutual Self-Help USDA Loan

Mutual self-help loans help low-income families to afford safe and clean homes or build their own.  Typically, the families perform most of the labor themselves.  Eligible families must have an income of less than 80% of the area’s average, must be without adequate housing, and cannot obtain credit elsewhere.

Terms for these USDA loans are for up to 38 years with effective interest rates of roughly 1%. 

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