Are USDA loans available to everyone? How to know if you qualify

USDA home loans provide a pathway to homeownership for low-income people and for people who are looking to buy a house in some parts of the country.

These mortgages are guaranteed by the United States Department of Agriculture under its Rural development program, which encourages home ownership in small communities across the country. If you don’t have enough money set aside for a advance payment or if you were denied a conventional loan, you have a good chance of qualifying for a USDA loan.

Don’t rule out a USDA loan for yourself, even if you’re not moving to a particularly rural area, as many suburban areas also qualify. This means that even if you are moving just outside of a city to get more square footage and land, chances are you will be moving to a USDA Designated Zone.

Here’s everything you need to know about USDA loans, how to get them, and if it’s the good type of home loan for you.

What is a USDA loan?

USDA loans are insured by the Department of Agriculture and have interest rate which are often lower than traditional mortgage rates. Unlike conventional loans and FHA Home Loans, both of which require a down payment, you can qualify for a USDA home loan with 0% down payment. USDA loans may also be easier to obtain, even if you’ve been turned down for a traditional mortgage.

So why have you never heard of it? There’s one major downside: These loans are only available to low-income buyers in USDA-designated rural and suburban areas. And while most of the landmass of the United States is technically considered rural, more 80% of the population lives in the 3% of towns and cities who are excluded from this loan program.

Types of USDA Loans

USDA-backed loans are the most common type of USDA mortgage, but there are also two other types of USDA loans: direct home loans and home improvement loans. Lower income buyers who may not be able to secure a conventional loan may qualify for a USDA direct loan, funded by the USDA with rates as low as 1%. If you are looking to upgrade a home you already own, you can also apply for a USDA home improvement loan or grant.

USDA guaranteed loans are obtained from a private lender – like a conventional loan – but are backed by the government. This offers a major advantage to private lenders because if you fail to repay your loan, the USDA will vouch for the lender’s repayment. Just like a conventional loan, if you put down less than 20%, you will have to pay mortgage insurance. Because of this government support, USDA mortgage insurance is less expensive than other types of mortgages.

What are the USDA loan requirements?

The USDA considers three main factors to determine your eligibility. First, you need to buy a house in a designated area. Then, your household income cannot exceed USDA Income Thresholds for your place of residence: 15% above the local median income. Finally, you’ll need a credit score of at least 640, although putting down money for a down payment may negate this requirement. If you meet the first two specifications but your credit score is low, you may still qualify for a USDA direct loan or an FHA loan.

Otherwise, the requirements are simple. You must be a US citizen, green card holder, or non-citizen national. Your mortgage payment cannot exceed 29% of your monthly income, and your debt ratio must not exceed 41% of your monthly salary. You will also need to use the home as your primary residence, have no history of mortgage breach or commitment to other federal programs, and meet any other lender-specific requirements.

How to Apply for a USDA Loan

When you apply for a USDA loan, you will need to submit documents proving your identity and income levels, just as you would for any financing agreement. Plan to submit a copy of your driver’s license or passport, social security card, tax returns and pay stubs for the past two years, and recent bank statements.

You may also be asked to provide additional documentation if you have no credit score, are applying with non-traditional credit, or have unpredictable income. You can view the full list of requirements at the USDA website.

Benefits of USDA Loans

No down payment requirement

If you can’t afford a down payment, you can still qualify for a USDA mortgage.

Lower interest rate

You can lock in a lower interest rate with a USDA loan compared to a conventional loan, especially if you have a good to excellent credit rating. This could save you tens of thousands of dollars in interest over the life of the loan.

Cheaper home loan insurance

Although USDA loans require mortgage insurance called collateral fees, it is much more affordable than private mortgage insurance and FHA insurance. You will pay an initial closing fee equal to 1% of your loan amount and 0.35% of the loan amount per year (from 2021).

Further assessment

Lenders order an appraisal to determine the value of a property before finalizing your loan. This ensures that they don’t lend you more money than the house is worth, thus protecting their investment. USDA assessments have stricter guidelines than conventional loans, which could save you from pulling the trigger on a home in need of costly repairs.

Designed for low-income buyers

If you’ve been turned down by a conventional lender because of your income, a USDA loan can still offer you a path to home ownership.

USDA Loan Limits

Strict income eligibility requirements

USDA loans are not for everyone. They are intended for low-income Americans who cannot qualify for a traditional mortgage.

Limited to properties in rural areas

If you live in a city or outside of a designated area, you will not be eligible for a USDA loan.

Longer purchase process

USDA secured loans usually have longer application and closing process since the loans are guaranteed twice – once by the private lender and then by the USDA.

Pay more over time

Although USDA loans are designed to make home ownership more affordable, requiring mortgage insurance could mean you pay more over the life of your home loan.

No option to terminate mortgage loan insurance

You can waive PMI on conventional mortgages (and sometimes even FHA loans) once you reach a certain level of equity. Secured fees on USDA mortgages may be cheaper, but they last for the life of the loan.

Is a USDA loan right for you?

These mortgage programs are more affordable than traditional mortgages, but they’re only possible if you don’t exceed income limits and buy a home in a designated rural area. If you are just above the income threshold or want to live in a city, you will need to explore other mortgage options.

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