USDA Loan Options

USDA Loan Options

There are two main types of USDA loans: Direct loans and Guaranteed loans. Each loan comes with its own set of features, requirements, and benefits.

USDA Direct loan

Direct Loans are provided directly by the USDA and are designed for low-and very low-income families buy homes in rural and suburban areas. USDA Direct loans offer no down payment requirement, very low interest rates, and flexible credit requirements. Since it is designed for lower income families, there is an income threshold. This threshold means that your base income must be 50%-80% of the medium income of the area you want to buy in.

The benefits of USDA Direct loans include:

• Very low interest rates: These loans often have very low interest rates, lower than other loan types, for low and very low-income borrowers. These lower interest rates reduce the amount of monthly payments and overall costs of the loan.
• No down payment: USDA Direct loans require no down payment.
• Flexible repayment terms: USDA Direct loans offer a payback period of up to 33 to 38 years depending on what borrowers can afford.
• Credit requirements: While a minimum credit score of 640 is recommended, manual underwriting is available for lower scores.
• Property options: USDA Direct loans are available for rural and suburban areas, many of which are close to major cities. About 97% of U.S. land is eligible for USDA loans.
• Property repair and renovation: USDA Direct loan funds can be used to buy, build, repair, or renovate a home.

USDA Direct loan requirements include:

• Income limits: In order to qualify for a USDA Direct loan your income must be 50%-80% of your area’s median income.

• Property requirements: The property must be in a designated rural area and meet safety and livability standards.
• Primary residence: The property you buy must be your primary residence. USDA Direct loans cannot be used for second homes or income generating properties like investment properties.
• Limited resources: In order to qualify for a USDA Direct loan borrowers must be unable to get a loan from another resource requiring reasonable terms and conditions.
• Loan limit: The value of the property must be less than the USDA loan limit for your area.

USDA Guaranteed loan

USDA Guaranteed loans are provided by private lenders and guaranteed by the USDA. They are available for lower-and moderate-income borrowers and offer many benefits including up to 100% financing, no down payment requirement, and competitive interest rates.

The benefits of USDA Guaranteed loans include:

• No down payment: USDA Guaranteed loans have no down payment requirement, similar to Direct loans.
• Competitive interest rates: USDA Guaranteed loans often offer lower interest rates than Conventional loans.
• No Private Mortgage Insurance (PMI): Unlike Conventional loans and FHA loans, USDA Guaranteed loans don’t have any mortgage insurance requirement. This can save you hundreds of dollars each month.
• Credit flexibility: It is generally recommended to have a minimum credit score of 620 or USDA Guaranteed loans, however, manual underwriting is available for borrowers with lower scores.
• Location options: As with USDA Direct loans, USDA Guaranteed loans are available for many areas across the nation. About 97% of U.S. land is eligible for USDA loans.
• Options for funds: Borrowers can use the funds from a USDA Guaranteed loan to buy, build, rehabilitate, or improve a home.

USDA Guaranteed loan requirements include:

• Property requirements: The property must be in a designated rural or suburban area and meet safety and livability standards.
• Appraisal: A USDA specific appraisal will be required to assess its value and to make sure the property meets the safety and livability standards mentioned above. This will include things like making sure that sewer and ventilation systems are working correctly, checking for structural integrity, and other property requirements.
• Income limits: Your household income must be at or below 115% of the area median income.
• Debt-to-income ratio (DTI): Your DTI for a USDA Guaranteed loan should generally be no more than 41%.
• Property use: The property must be your primary residence. USDA Guaranteed loans are not available for second homes or investment properties.
• Closing costs: While there is no down payment requirement, borrowers will still be required to pay closing costs on their loan. This is usually 2%-6% of the purchase price of the home.

USDA loans offer many benefits to low-to moderate- income borrowers, making homeownership more accessible and affordable. Whether you choose a Direct loan or a Guaranteed loan, you can benefit from a zero down payment, competitive interest rates, and no PMI. Meeting the requirements for these loans can open up homeownership to borrowers across the country.