Since 1991, the U.S. Department of Agriculture (USDA) has been offering rural development loans to encourage people to buy homes out in the country or in suburban areas of big cities. Hence, the USDA loan was born to give those with low to moderate incomes access to a great zero-down payment loan program.
What is the USDA home loan program?
The USDA does oversee the American farming industry, and it does ensure the safety of food coming from those farms. However, the USDA mortgage program was designed to boost the economies of smaller towns and rural areas.
“A lot of people are renting because they don’t feel like they can save enough money to get a house,” says Patty Napgezek, a loan consultant at Inlanta Mortgage in Brookfield, Wisconsin. “But a USDA loan allows zero percent down. It’s truly helping people get into homeownership that never thought they could.”
Finding a USDA Lender
Surprisingly, some lenders and banks don’t even offer these loans.
“If those lenders aren’t certified to do USDA loans, they don’t steer borrowers in the right direction to someone who can help them,” says Napgezek. Even many realtors don’t know much about USDA loans, which is a shame, she says.
“I do market this loan to realtors. They will get those first-time homebuyers or people who have good jobs but just no down payment. Unless we educate our realtors on the advantages of his loan, many people won’t hear about them,” Napgezek adds.
The United States Department of Agriculture maintains a list of approved USDA lenders on its website.
A loan officer with USDA experience can help you take advantage of this program.
Benefits of USDA Loans
These mortgage loans have some amazing benefits, Napgezek says. Some of the highlights that they offer borrowers include:
- Low mortgage interest rates with 30-year fixed loans
- Government guaranteed
- Ability to roll in your closing costs into the loan
- Flexible credit guidelines
- No down payment
- No maximum purchase price
- Not limited to first-time buyers
- Homeowner counseling is not required
“It’s a wonderful loan. You do have to be within the USDA income eligibility limits and find a property designated within the USDA map,” she says.
She sees a lot of younger people coming out of college with tons of student debt. The USDA loan program is helping people like them to become homeowners, without needing to wait until they’ve saved enough for a big down payment.
USDA Loan Requirements
Here are some important things to know about USDA Loans:
Two Types of USDA Home Loans
The Rural Home Loans offer two types of loans: direct and guaranteed.
The Direct Loan is offered by the government, itself, to very low and low-income applicants, and the loans are subsidized making the interest rate as low as 1 percent. The loan payback period is set at 33 years or can be extended to 38 years for those who can’t afford the 33 years. Applicants must contact their local Rural Development office to ask about eligibility requirements and how to proceed with an application. Those interested can contact their nearest RD office here.
The Guaranteed Rural Housing Program allows approved lenders to help low- to moderate-income households with a loan to the opportunity to build, rehabilitate, improve or relocate a house in an eligible rural area, according to the USDA website. The program provides insurance, so to speak, to approved lenders in order to reduce the risk of extending 100% loans (loans that require no down payment).
Borrowers need to find an approved lender to start the application process.
Just because USDA loans require rural properties, that doesn’t mean your new home will be miles and miles away from any neighbors. Each state has a USDA map that shows what areas are eligible. You might be surprised what suburban neighborhoods are included. Some are very close to metropolitan cities.
“Some of the homes are on the perimeters of townships or big cities. There probably won’t be any in the downtown of a city, but more on the outlying areas,” she says.
Generally, the population of the area is 20,000 or less. But it really depends on the town and state. As of the writing of this article, population numbers are taken from the census that happened in the year 2000. Many eligible areas now have much bigger populations.
If you are unsure if your area is eligible, contact an approved USDA lender now.
Though there are no loan limits with a USDA loan limit, there are income limits. This housing loan program is designed to help low to moderate-income families purchase a primary residence and income limits help to ensure the program is accomplishing this.
The USDA determines an applicant’s income in two different ways.
The governmental agency looks into the eligibility income, which includes alimony, child support, and salary, received by the applicant and anyone in the household who is 18 and over.
If a household makes too much, the USDA will consider downward adjustments for child care and medical expenses. The adjusted household income cannot exceed 115 percent of the median income for the area.
Official property and income eligibility information can be found here.
If you wanted to see a quick glance at the differences in income eligibility for a direct loan or a guaranteed loan, take a look at someone that might want to buy in the rural areas of Omaha, Nebraska. For a very low-income family of four people, the income level for a direct loan would be $36,500. For a guaranteed loan, the income could go as high as $73,000.
The USDA imposes a minimum credit score of 640 though individual lenders may have higher minimums.
“They can be a little picky on this. They look at credit more selectively on a USDA loan than an FHA loan or even a conventional loan,” Napgezek says. “The good thing is that USDA lenders can use rental history if the borrowers haven’t built up much credit history.”
They don’t want to see any late payments on your credit report: no more than one 30-day late payment in the past 12 months. If the borrowers have had a bankruptcy or foreclosure in the past, it has to be at least three years ago. And there can’t be any outstanding judgments in the past year, she says.
USDA Loan FAQ
Is the USDA program limited to first-time homebuyers?
The USDA loan program is open to both first-time and repeat homebuyers.
Can I get a 15-year USDA loan?
The USDA offers only a 30-year fixed-rate mortgage. USDA borrowers do not have the option of a 15-year loan term or an adjustable-rate mortgage.
Are there USDA loan limits?
The USDA does not impose loan limits in the traditional sense though your maximum loan amount will be determined by your household’s income and debt-to-income ratio.
Do USDA loans require mortgage insurance?
Yes, USDA loans require mortgage insurance, including a 1 percent upfront fee and an annual 3.5 percent fee, which will be divided by 12 and rolled into your monthly mortgage payments.
Can I refinance a USDA loan?
Yes, USDA home loans can be refinanced. The USDA Streamline Refinance Program allows you to refinance quickly, without an appraisal or income and credit verification, and take advantage of low mortgage interest rates.
Apply for a USDA Loan
USDA home loan rates are low, and home buyers are often surprised they can qualify. Now is a great time to apply and start your homeownership journey.