What are USDA Home Loans?

Homeowners looking to buy property in suburban and rural areas can take advantage of the USDA home loans. By offering borrowers zero down payment home loan programs, these housing loans are an ideal financing opportunity for achieving the American dream of home ownership. Let’s begin by explaining the function of the United States Department of Agriculture (USDA). Namely, the primary function is to provide leadership on food, agriculture, natural resources, rural development, nutrition, and related issues based on public policy, the best available science, and effective management.

One common misbelief is that USDA home loans are only eligible to farmers and ranchers to provide real estate opportunities to fund crop growth and establish farms. Although USDA funding is an option for agriculture and farming growth, borrowers can also use USDA loans to purchase safe homes in rural and suburban areas. 

The intent and purpose of USDA rural loan programs is to create opportunities for American people to achieve homeownership through accessible funding. USDA housing programs not only provide financing for lower-income earning citizens but also facilitate smaller mortgages and lower monthly payments. The goal is to provide citizens with safe and healthy living conditions to improve their quality of life.

Incredible homeownership opportunities began after World War II, in 1949, when the USDA loan programs became a crucial element of the American Housing Act.

What do USDA Home Loans offer that conventional mortgages do not?

In essence, two different U.S. Department of Agriculture loan programs are available for housing in rural or undeveloped areas. In the end, both loans offer zero down payment opportunities. Overall, the primary difference lies in who provides the funds for the loan. USDA Home Loans offer financing opportunities to low-income residents who need help meeting the traditional lending practice standards of loan requirements.

The first option is a Section 502 USDA-Guaranteed Loan.

In the case of the guaranteed loan program, funds come from private lenders, and the USDA backs the loan if the borrower defaults on their USDA home loan mortgage payments. Eligible applicants must meet the criteria of low to moderate income. In a nutshell, a USDA-guaranteed loan is a federal guarantee on a loan offered through a commercial bank.

Eligibility Requirements and Criteria

1. Income limits may not exceed 115% of the area’s median income.
2. Property must be located in a rural area and appraise within a “modest” standard value for the area.
3. Must be an owner-occupied primary residence and cannot have an in-ground pool.
4. Debt to income ratio (DTI) below 41%
5. Credit Score No minimum, but above 640 is preferred.
6. Show proof of employment history for a one-year minimum. Self-employed candidates need a 2-year minimum.
7. The USDA offers lending opportunities to American citizens; noncitizens are not eligible.
8. Borrowers pay 1% of the purchase price upfront and an annual fee of 0.35% (Instead of PMI)

The second option is a direct USDA Home Loans/Section 502 Direct Loan.

Primarily, most loans come from partnered lenders; however, in some situations, like when a borrower’s income is below standard lending limits, the USDA will back the loan itself. In this case, the USDA serves the role of a lender. To better help with terminology, these loans are also called Single-Family Housing Direct Loans. With this type of loan, Homeowners remit all payments directly to the USDA. Correspondingly, all loan applications will be accepted and processed through local Rural Development Service Centers. 

Additionally, USDA-guaranteed loan programs offer 100% financing. Therefore, there is no collection of a downpayment. It should be noted that the appraisal value can only be exceeded by an escrow deposit, appraisal fee, tax service fees, and homebuyer education costs.

Eligibility Requirements and Criteria

1. Income limits low and very low income is ideal. (Each county has its specific criteria.)
2. Property must be in a rural area with a population lower than 35,000.
3. It must be an owner-occupied primary residence and cannot have an in-ground pool, nor can the property generate income.
4. 2000 sqft or less, and the property may not be divided into smaller parcels.
5. Debt to income ratio (DTI) below 41%
6. Credit Score No minimum, but above 640 is preferred.
7. The USDA offers lending opportunities to American citizens; noncitizens are not eligible.
8. Loan terms of up to 38 years.
9. Borrowers previously prohibited from federal programs are ineligible.
10. Single-family housing direct loans cannot finance a property valued above the area’s loan limit.

The third option is home improvement loans and grants.

In essence, grants are outright financial rewards. USDA Loans and Grants allow a homeowner to upgrade their property without having to refinance. Given these points, there are caps on loan amounts. USDA grants have a maximum allowance of $10,000; the maximum loan amount is $40,000. It should be noted that combining grants and loans is permissible. In that case, a borrower can receive a total value of $50,000 to improve their quality of life. Undoubtedly, the best benefit to a USDA Home Loan is a 20-year loan term, with a fixed rate of 1%, so there is no need to worry about current interest and mortgage rates.

Finding USDA-eligible properties is easy.

Since USDA home loans require property locations within eligible rural areas, check out this USDA eligibility map. Considering the opportunities that government-backed financing offers, as with all significant financial commitments, consulting with a USDA representative is advised to ensure up-to-date and accurate information on any potential property.

Benefits of USDA Home Loans

• Qualifying for USDA mortgage loans is less complicated than meeting the standard criteria for a conventional loan, an FHA loan, or a VA loan program.
• USDA rural development financing provides citizens with safe, clean, and sound living conditions they wouldn’t traditionally qualify for.
• Skip homeowners insurance and Private Mortgage Insurance (PMI) altogether.
• USDA Home Loans allow borrowers to roll the guarantee fee into the life of the loan.
• Low-income borrowers without clean and safe housing may temporarily qualify for payment assistance to lower monthly payments.
• Lower Interest Rates and Origination Fees since these are government-backed loans.
• Get money fast! Borrowers access streamlined refinancing timelines with the assist refinance loan program. In most cases, loan approvals occur within three weeks. 
• Best of all, there is no need to perform property appraisals, credit requirement reports, or home inspections.
• Income eligibility requirements are lenient to facilitate access to funding for moderate-income, median-income, and low-income borrowers.
• Great for first-time homebuyers, since debt-to-income ratios are less strict, and household income and monthly income requirements are lower, there is much less underwriting scrutiny.
• Many nonprofit agencies offer down payment and closing cost assistance through grants for USDA home loans.

Now that you know how USDA home loans work, here is a lender that can help get you started.

The steps are simple:

1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.

2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.

3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.

With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.