USDA/Rural Development Loans
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What is a USDA Home Loan?
The USDA loan is also known as the USDA Rural Development Guaranteed Housing Loan Program. Like the FHA, VA and other government-backed loans, it’s guaranteed by the U.S. Department of Agriculture. It was originally designed to provide a mortgage alternative to rural property buyers who had limited financing options. Today, as populations grow and suburbs expand, it’s not just a loan for farmers and rural property owners. It’s becoming a viable mortgage option for people who want to live away from cities and enjoy country living.
The USDA Loan benefits
No down payment: The USDA loan comes with 100% financing. You don’t need to make a down payment, which can often be a big obstacle for first-time homebuyers.
Very low interest rates: Because the loan is guaranteed, lenders offer a lower standard interest rate that is not tied to your credit score or down payment.
Low monthly private mortgage insurance: As of 2019, the upfront mortgage insurance rate on a USDA loan is just 1%, with an annual fee of only 0.35%, the lowest numbers of virtually any mortgage financing program. The upfront fee can also be rolled into the loan, eliminating an out-of-pocket expense at closing.
Flexible credit guidelines: Borrowers with lower credit scores or less than perfect credit history can often meet the program’s qualifying guidelines.
USDA loan restrictions and eligibility requirements
Eligible Geographic Areas: To get a USDA loan, the property you buy has to be in a USDA designated rural area, but it’s not all farm land. Almost 97% of the U.S. is eligible, which includes small towns and suburbs. The USDA Mortgage eligible area requirement map will show you all the areas where you can use this loan.
Income limits: THE USDA loan was originally designed for low to moderate income earners. The program’s guidelines define income level as being up to 115% of the area’s median income. In many parts of the country, this can be quite generous. For lower income buyers, all of a household’s income is considered during the application process, which helps increase eligibility. This can include income from a child or other family member living in the house but who isn’t listed on the loan application.
Length of the loan: The USDA loan is a 30-year fixed rate loan. One of the most common types of mortgage, with low and affordable monthly payments.
What’s A USDA/Rural Development Loan?
USDA/Rural Development loans are mortgage loans that help make purchasing a home more affordable for those living in rural areas. The U.S. Department of Agriculture backs USDA loans in the same way the Department of Veterans Affairs backs VA loans for veterans and their families. This government backing means compared to conventional loans, mortgage lenders can offer lower interest rates. If you qualify, you can buy a home with no down payment, although you’ll still need to pay closing costs.
What Are USDA/Rural Development Loan Requirements?
You need to meet certain criteria to be considered for a USDA/Rural Development loan to buy a home. For example, you must live in the home and it must be your primary residence. Here’s an overview of the other requirements.
Residency
You must be a U.S. resident, non-citizen national or Qualified Alien.
Location
Homes financed by a USDA/Rural Development loan must be in an eligible rural or suburban area. You can see if a home is eligible by visiting the USDA’s eligibility site. You’ll need the home’s address; after you accept the disclaimer, select the Single Family Housing Guaranteed option (don’t choose Single Family Housing Direct; that’s a different kind of loan). Then just type in the address.
Income
USDA/Rural Development loans are for families who demonstrate economic need, so your adjusted gross income can’t be more than 115% of the median income in the area. You can find out if your income is eligible in the same place you check property eligibility. Just follow the same link and instructions, except choose Income Eligibility from the menu.
In addition, to qualify you must show that you have a stable income and can make your mortgage payments without incident for at least 12 months based on your assets, savings and current income.
Your mortgage lender will also look at your debt-to-income (DTI) ratio when they consider you for a USDA loan. To qualify for a USDA Rural Development loan, it’s best for your DTI to be 50% or lower. You can calculate your DTI ratio by dividing all of your monthly recurring debts by your gross monthly income. Your monthly expenses should include rent, student and auto loan payments, credit card payments; you don’t need to include expenses for food and utilities.
Credit Score
Most lenders require a credit score of 640 or better. If your score is close to that or below, you may still qualify. Talk to a lender to discuss your options.
How Do USDA Loans Compare To Conventional Loans?
A USDA/Rural Development loan and a conventional loan are both a kind of mortgage you get to finance a home. “Conventional” just means a type of mortgage that isn’t backed by the government, like FHA, USDA and VA loans.
You pay them all back the same way, in monthly payments with interest. But USDA/Rural Development loans, like other government-backed loans, are different in a few ways.
Down Payment
Coming up with enough cash to close on a home - your down payment and closing costs - is one of the biggest hurdles many people face. It’s possible to get a conventional loan with much less than the traditional 20% down payment. But there are only two kinds of loans that offer zero-down financing to those who qualify: USDA/Rural Development and VA loans. If you don’t meet the VA’s military service guidelines, a USDA/Rural Development loan may be an option for you. Then you’ll only need to save for closing costs.
Mortgage Insurance
The reason the 20% down payment is still around is mortgage insurance. Think of your down payment as upfront mortgage insurance. When you put more than 20% down on a conventional loan, you don’t have to pay private mortgage insurance.
Mortgage insurance makes up for a smaller down payment. It’s added to your monthly mortgage payment until you’ve paid off a certain amount of your loan.
You do have to pay mortgage insurance on a USDA/Rural Development loan, which goes toward funding the USDA/Rural Development loan program. It will likely cost you much less than the PMI on a conventional loan, since it’s capped at 1% of your loan amount. You can also roll it into your loan amount.
Appraisals
Both USDA/Rural Development loans and conventional loans require an appraisal by an independent third-party before approving the loan, but they have slightly different purposes.
For a conventional loan, the appraisal makes sure the loan amount is appropriate for the home’s value. If a conventional lender issues you a loan that’s greater than the property value, they can’t recoup their losses from the price of the physical property. If you want a report on the condition of the home and potential issues, like the condition of the roof, appliances, etc., you hire a home inspector.
An appraisal for a USDA/Rural Development loan does all these things:
Like an appraisal for a conventional loan, it checks to see that the value of the home is appropriate for the loan amount.
It makes sure the condition of the home meets USDA/Rural Development standards. That means if must be in basic livable condition to qualify. Things like the roof and heating systems must work and be up to code. It can’t have broken windows. The appraiser will look for insect damage, and check that the well and septic systems meet USDA guidelines.
If you want a more in-depth report on what you’re buying, you should still hire a home inspector.
Summary
USDA/Rural Development loans help make purchasing a home more affordable for those living in qualifying rural areas. Though you'll still pay closing costs, if you qualify, you'll likely get a lower interest rate and have no down payment.
You can do a preliminary check on the USDA/Rural Development eligibility site to see if the address of a home you’re interested in and your income qualifies, but it’s always best to let an expert help you understand your mortgage options. Parish Lending can help you find the bets option to fit your situation.