Guide to USDA Loans
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.
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, so 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:
- Get preapproved for a mortgage by contacting a lender.
- Verify eligibility by checking USDA applicant requirements. A lender can also help with this.
- Find a home you want to purchase.
- Meet USDA credit qualifying and income eligibility requirements.
- Verify the property meets USDA eligibility guidelines.
- Lender adds the property details to the loan file and submits to USDA for final sign-off.
- Lender closes the loan.
- Move in!
USDA Loan Benefits
- No down payment required
- More flexible credit score requirements (as low as 580 with New American Funding)
- 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 to defined geographical areas, 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.
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%-32% of your monthly income depending on credit qualifications
- You must have a reliable source of income, usually at least 12 months’ history of receipt for most sources of income
- Strong credit history—no accounts moved to collections in the last 12 months
USDA Home Loan Options
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 a fixed interest rate.