Perhaps you feel more at home if you are surrounded by grasses, flowers and mountains; this instead of in a big city full of chaos, traffic and pavement. If so, the purchase of a rural house could be within your reach. How? Thanks to a mortgage loan from the United States Department of Agriculture (USDA or United States Department of Agriculture).
In fact, the USDA might have one of the government’s lesser-known mortgage assistance programs, but not for that the least favorable: quite the opposite.
What is a USDA home loan?
Basically, it is a mortgage subject to a zero dollar down payment, as long as the buyer wishes to purchase an eligible rural or suburban home. USDA mortgage loans are issued through the USDA program, also known as the USDA Rural Development Guaranteed Housing Loan Program, which is administered by the United States Department of Agriculture. .
What is the USDA Program?
The USDA Program is a series of loans subject to the USDA Rural Development Determinants. What this program seeks is to strengthen the country’s economy, help homebuyers to buy a rural house and become owners, and improve the quality of life in suburban areas, that is, those that are far from the big cities .
The USDA Program itself is based on providing families with clean, safe and suitable properties for life. Of course, there’s much more to the program than the USDA home loan—they also have loans for home repairs, remodeling and retrofits, home efficiency improvements, and even to start construction on new properties.
According to their website, since 2009 the USDA Program has helped more than a million families – some four million Americans – to move to small towns. This drives up the price of those properties, encourages community growth, and also raises the employment rate; thus activating the economy.
What is rural credit?
Rural credit is how USDA mortgage loans are popularly known. Through rural credit, the United States Department of Agriculture helps qualifying low-income or middle-class families to acquire their own habitable, spacious and equipped home to lead a decent life on the outskirts of large cities.
Of course, the program includes a series of requirements that apply not only to the borrower or applicant, but also to the house in question: both must meet the eligibility requirements to be eligible for financing.
How does a USDA home loan work?
Now that you are clear about what a USDA mortgage loan or rural credit is and what the USDA Program is and who administers it, it is time to talk about what are the types of financing. In itself, what you should know is that there are three types of USDA mortgage loans, namely:
- Secured loans: USDA guarantees a mortgage issued by a participating local lender; something similar to what happens with a fha loan or with loans backed by the VA (Veterans Affairs). This will allow you to access a low mortgage interest rate, even if you do not have enough money for a down payment. However, if you put little or no cash down on the loan, you will be at a disadvantage. Which one? Pay a mortgage insurance premium.
- Direct loans: These are home loans issued directly by the USDA, hence their name. These mortgages are for low and very low income applicants. Income thresholds vary by region. With the subsidies offered by the program, interest rates can be as low as 1%.
- Home Improvement Loans and Grants: These direct finance loans or grants allow homeowners to repair or improve their homes. Packages can also combine a loan and a grant providing up to $27,500 in assistance.
So if we look a little further than this classification, we might conclude that the USDA preferably issues mortgages to those applicants who are most in need, financially speaking. This means that they prefer to choose an individual or family that:
- Do not have decent, safe and sanitary housing to live in.
- You can’t get a home loan through traditional channels.
- Have an income level adjusted to the limit that the institution manages as “low resources” or even below this amount. (It will depend on the county where you live.)
The USDA typically issues direct loans for homes 2,000 square feet – or less – that have a market value below the area’s loan limit. Again, this feature will depend on your place of residence. USDA home loans can be as high as $500,000 or more in the most expensive real estate markets – like California and Hawaii – and as low as just over $100,000 in more rural and cheaper areas.
How to qualify for a USDA home loan?
The income limits to qualify for a USDA-guaranteed home loan vary depending on the location of the house and the size of the family. To find the exact limit based on the county you live in, you can refer to this USDA map.
Yes indeed: You should know that USDA-guaranteed home loans are designed to finance owner-occupied primary residences. Other eligibility requirements include the following:
- Have US citizenship (or permanent residence, failing that). This requirement is not flexible in any of the cases.
- Have the ability to make a monthly payment that includes principal, interest, insurance, and taxes. This monthly payment is calculated at a maximum of 29% or less of your monthly income. On the other hand, it is determined that the other monthly payments you make cannot exceed 41% of your income. However, the USDA might consider a higher debt-to-income ratio if you have a credit score above 680 points.
- Prove that you have a fixed and reliable income. In general, they will ask you for pay stubs and bank statements from the last 24 months or even more.
- Have an acceptable credit history. That is, without accounts converted into collections in the last 12 months, among other criteria. If you can show that your credit was affected by temporary or out-of-control circumstances — like the pandemic, for example — you might qualify even without a good or stellar credit history.
Applicants with a credit score of 640 points or higher receive streamlined processing. Those who are below this point must comply with much stricter conditions. However, you should know that it is possible to qualify, even if you don’t have the best credit history in the world. Everything will depend on your particular case.
What are the eligible locations for the USDA home loan?
Metropolitan areas are generally excluded from the USDA program, but there may be some good opportunity locations in the suburbs near them. As for rural areas, all of them are eligible.
How to apply for a USDA mortgage loan?
To apply for a USDA-backed loan, you must find a participating lender in the program. If you are interested in purchasing a mortgage or home improvement loan or grant, be sure to contact your state USDA office.
The USDA rural credit may seem from a distance a type of financing that is directed only to farmers and ranchers, but the truth is that it has nothing to do with it. Eligibility simply focuses on income limit and housing location.