What Are USDA Home Loans And How Do You Qualify For One?

If you are buying a loan in a rural or suburban part of the country, affordable financing may be within reach thanks to the USDA home loan program. USDA home loans are an option for many shoppers looking to buy a home in certain areas. Let’s find out if this is the right choice for your home buying journey.

What Are USDA Home Loans?

The U.S. Department of Agriculture provides backing for the USDA loan program. The goal of the program is to help families with low or moderate incomes achieve their dream of homeownership. With a solid footing in homeownership, the hope is that these families can create a better quality of life and build strong rural communities.

This USDA rural development program has been helping rural families become homeowners since launching in 1991, If you qualify for a USDA home loan, you will not need to make a down payment for your home purchase. Plus, you can avoid private mortgage insurance (PMI). However, you will be required to pay any closing costs that accompany this major purchase.

How Does A USDA Loan Work?

The USDA loan program offers three different options. It’s important to weigh out your options before moving forward with any particular type. Let’s take a closer look at each.

Loan Guarantees

The USDA offers guarantees to pay the lender a portion of your mortgage if you default on your loan.

If you have a low income or poor credit score, the USDA loan can help you get into a new home with relatively affordable financing. With the backing of the USDA, lenders are more likely to offer favorable terms to you.

However, this guarantee comes at a cost. Borrowers must pay a USDA upfront guarantee fee of up to 3.5% of the loan balance at closing. Plus, there will be an annual fee of up to 0.5% of the loan balance for the life of the loan.

Direct Loans

With direct loans, the USDA funds the mortgage directly. Instead of working with a financial institution like a bank or credit union, you will work directly with the USDA.

If you have a very low income, then this may be one of your only options. A USDA direct loan can help you finance an adequate residence if you fall below their income limits for the area. The low interest rates and flexible requirements make this a viable option.

Home Improvement

The third piece of the USDA loan program is the home improvement loan component. You can use these funds to repair your space, improve your home or remove health and safety hazards. In some cases, you may qualify for a grant that allows you to take the funds without ever paying them back. However, grants can only be used to remove health and safety hazards and are only offered to homeowners over the age of 62 without the means to repay a loan.

As of 2022, the maximum loan amount is $40,000 and the lifetime maximum grant amount is $10,000. When combined, the maximum loan and grant amount for a homeowner is $50,000. For homeowners with limited means, you may be offered a combination of loan and grant opportunities to make necessary repairs financially feasible.

If you take out one of these loans, it comes with a 20-year term and 1% interest rate. If you sell the home within 3 years of accepting a grant, then you have to repay the grant.

Although this is a good opportunity, it’s only an option if you cannot access affordable financing options elsewhere due to a very low income.

What Are The Requirements To Get A USDA Home Loan?

The USDA loan program has specific requirements for the property being purchased and the borrowers themselves. Here’s a closer look at the USDA qualifications.

USDA Eligibility For Properties

First and foremost, the USDA home loan program only approves real estate that will serve as a primary residence located in a suburban or rural area.

The USDA determines what rural areas are eligible, so there’s no guessing involved. You can scope out the area you had in mind through the USDA’s interactive map. With this easy visual, you can quickly narrow your search for a home that qualifies for a USDA loan.

USDA Qualifications For Borrowers

If you are considering a USDA loan, you’ll need to meet the following eligibility criteria.

• Residency: You must be a U.S. citizen or qualified noncitizen who is a permanent resident.
• Household income: USDA loan borrowers cannot make more than 115% of the area’s median income. The income limit varies based on the particular county you plan to buy in.
• Debt-to-income ratio (DTI): Your debt-to-income ratio is a measure of how your monthly payments stack up against your monthly income. USDA loans require borrowers to have a DTI of 50% of less.
• Credit score: Borrowers will need a credit score of at least 640, making USDA loans a great opportunity for many potential home buyers.

How Does A USDA Loan Compare To Other Options?

In general, a USDA loan is an attractive loan opportunity if you are able to secure it.

With the backing of the USDA, you can potentially unlock access to better loan terms. In many ways, these benefits are similar to the FHA and VA loan programs. But with a focus on rural buyers and options for very low-income households, the USDA loan could be a better fit for some rural families.

Although the loan shares some similarities with other government backed loans, USDA loans are dramatically different from conventional loans.

If you’re struggling to build a down payment, then you are not alone. Many home buyers struggle to save enough to cover their down payment. With a USDA loan, you do not need to save for a down payment at all. However, you will need to save enough to cover closing costs, including an up to 3.5% upfront guarantee fee. And you will need to cover an annual guarantee fee of up to 0.5% of your loan.

USDA Loan Program FAQs

How long does USDA loan approval take?

The USDA loan application process takes about 30 to 45 days once you’ve finalized your purchase agreement. Of course, the sooner you get the required information and personal documents to your lender, the quicker they can approve your mortgage.

Do USDA loans have good mortgage rates?

In general, USDA loans have good mortgage rates. It’s usually a much lower fixed rate than you’d find with other types of financing.

For example, in June 2022, the interest rate for a Single Family Housing Direct home loan was around 3.00%. That’s a relatively good mortgage rate, especially when you consider this Direct home loan option is targeted for low-income borrowers.

How many times can I use a USDA loan?

The U.S. Department of Agriculture doesn’t allow a borrower to purchase a second home with a USDA loan, and they only approve mortgages for primary residences. That means you can’t have more than one USDA loan at a time.

However, you could potentially get more than one USDA loan throughout your life. For example, let’s say that you purchase a home with a USDA loan. After a decade in the home, you decide to sell it. At that point, it’s possible you would qualify for another USDA loan for your new primary residence in a qualifying rural area.

Are first-time home buyers eligible for a USDA loan?

Yes, first-time home buyers are eligible for USDA loans. However, you don’t have to be a first-time buyer to qualify. Repeat buyers are also eligible for this type of financing.

The Bottom Line

The USDA home loan program was built to help strengthen communities in rural areas. This loan option presents a great opportunity for many rural home buyers to purchase a home with relatively low qualification requirements.

As you navigate the home buying process, consider learning more about down payment assistance programs that could help put homeownership within your reach.