Everything You Need to Know About USDA Home Loans

usda home loans

You know the drill: if you want to buy a home, you better come up with a 20 percent down payment. If you are willing to borrow more, you can get an FHA mortgage and perhaps get away with a down payment as low as 3.5 percent.

But what if you don’t want to put any money down at all? If you’re a veteran, you might be able to get a VA loan with nothing down. But what if you don’t qualify for a VA loan? In that case, you might check with … The Department of Agriculture.

Wait, the USDA has a home loan program?

At first, it may seem counter-intuitive that the U.S. Department of Agriculture (USDA) has a loan program. It makes a little more sense when you consider that these loans are only available to those who plan to use the funds to buy a home in a rural area.

USDA home loans are offered through the office of Rural Development. They’re designed to help families located in rural areas with low to moderate incomes afford homeownership.

There are three types of USDA home loan programs.

  1. Loan guarantees. The USDA offers a 90 percent loan guarantee to lenders who offer 100 percent financing to qualified applicants. You get the mortgage from an approved lender, and the government backs the loan.
  2. Direct loans. For lower-income applicants, the USDA makes direct loans. You can get a loan for a home in a rural area with payment assistance. Interest rates can be as low as 1%. On top of that, repayment periods can be up to 33 years (38 years for applicants with very low incomes), which is longer than typical 30-year mortgages.
  3. Home improvement loans (and grants). On top of purchase loans, it’s also possible to get a USDA home improvement loan. You can even combine one of these loans with a home improvement grant for additional assistance.

Who’s eligible for USDA home loans?

First of all, a USDA home loan isn’t available to just anyone. Most importantly, the address of the home in question must fall in an area considered rural by the USDA.

Beyond that, each of the programs has its own eligibility requirements. Here’s a run-down of what’s needed.

How to get a USDA-backed mortgage

The USDA home loan guarantee program helps those with low to moderate incomes, based on the size of your household and where you live. You can check your household income against the eligibility requirements using the USDA’s interactive map.

You have to agree to live in the home you buy with your USDA mortgage. U.S. citizenship or permanent residency is also required.

You also need to provide proof of stable income. Your income and debt level will be evaluated to ensure that the following ratios are met:

  • Your total monthly payment, including principal, interest, taxes, and insurance, is no more than 29 percent of your repayment income.
  • Total debt payments can’t exceed 41 percent of your repayment income.

It’s possible to obtain a debt-ratio waiver if you meet certain conditions, including a credit score of 680. Your mortgage rate is based on your credit score and other factors, the same as any other loan.

A knowledgeable mortgage broker can help you see if you qualify for a USDA loan in your area. Additionally, the USDA maintains a list of approved lenders.

Qualifying for a direct USDA home loan

The eligibility requirements for a direct USDA mortgage are more stringent than those for the loan guarantee program. A direct home loan is for rural residents with “low” or “very low” incomes. (The levels for these vary by location — you can see the income limits on this USDA map.)

To qualify, applicants must already be without “decent, safe, and sanitary housing.” They must also be unable to get a loan from other sources at terms they can be “reasonably” expected to meet. As with the guarantee program, applicants are expected to live in the home, have enough income to repay the loan, and meet citizenship (or eligible noncitizen) requirements.

On top of that, USDA direct loan funds are disbursed based on property parameters. In general, the home should be 2,000 square feet or less, and the market value shouldn’t be more than the loan limit in the area.

To apply, you need to get in contact with your state’s Rural Development point person. You can use a map from the USDA to click on your state and find information about your local contact.

What about USDA home improvement loans?

If you already have a home and you need to make repairs, but you have a very low income and can’t get an affordable loan someplace else, you might qualify for the USDA Home Repair program.

This program includes a low-rate mortgage and grants. To qualify for the mortgage, you need to be the homeowner, you must be living in the house, and your family income should be below 50 percent of the area’s median. Grants are another story, though — here, you must be at least 62 years old and unable to repay a repair loan.

Funds from the program can be repaid over the course of 20 years. The money can be used to “repair, improve, or modernize homes or remove health and safety hazards.”

As with the direct loan program, you need to contact a USDA home loan specialist in your state to confirm your eligibility.

So, is a USDA home loan right for you?

You don’t have to be a farmer or rancher to take advantage of USDA loan programs. All you have to do is meet the income and location requirements.

If you know you’ll stick around for a few years, one of the USDA home loans might be a good way for you to afford a home, particularly if you are struggling to come up with a down payment. However, realize that the lower your down payment, the more you borrow — and the more you will have to pay back over time.

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Published in Buying a House, Mortgage