What is a USDA Loan?

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Point of Interest

If you’re trying to buy a home in a rural area, you may want to look into USDA loans. A USDA home loan offers rural and suburban customers a chance to buy a home — even if they can’t qualify for a conventional mortgage.

Intro 

USDA loans are perfect for potential homebuyers who are looking to purchase a home in a rural corner of the nation but are struggling to afford it. A USDA home loan gives rural homebuyers who qualify access to a low-interest mortgage backed by the United States Department of Agriculture (USDA). These home loans are a part of the USDA’s Rural Development program that seeks to “improve the economy and quality of life in rural America.”

Is a USDA loan right for your needs? Well, it depends. You’ll need to do your research, but in many cases, a USDA home loan can help you get the house of your dreams without going over budget.

Tip

Some USDA home loans are available in more populated areas that surround large cities, such as Indianapolis, Indiana and Seattle, Washington.

What is a USDA loan? 

USDA home loans target rural and suburban populations that either can’t qualify for a conventional mortgage or can’t afford the hefty down payment for a traditional mortgage. This type of loan is government-backed, which means that the U.S. government promises to pay the lender for a specific percentage of the loan if you default.

This government backing makes it easier for you to get a low interest rate, since the government backing makes you a less risky customer. Interest rates on a USDA home loan can be as low as 1% when modified by payment assistance, and you may not have to make a down payment for a USDA loan.

If you’re wondering whether you qualify for this type of loan, the income qualifications will depend on the area you live in. However, you can see the income limits using the USDA location breakdown.

Tip: If you already own your home, you can still be eligible for a home repair loan or grant through the USDA. However, you can’t sell your house within three years of receiving a grant or you’ll have to repay it.

How to get a USDA loan

There are three types of USDA loans you can apply for: a guaranteed loan, a direct loan or a home repair loan.

The Single Family Housing Guaranteed Loan Program works with eligible local lenders to get you a mortgage with no down payment. However, if you don’t make a down payment, you’ll have to pay primary mortgage insurance (PMI) each month. To get this loan, you must meet income requirements — no more than 115% of median household income — and you must agree to live in the home. These loans are available in some suburban areas as well as rural areas.

On the other hand, Single Family Housing Direct Home Loans from the USDA are geared toward low-income or very low-income residents. This option is specifically for rural areas with fewer than 35,000 people. You can use the money to repair unsafe or hazardous housing conditions, to relocate a home or to renovate a home, as well as to purchase a home. Your payback period will be up to 33 years, and you qualify as long as your house is smaller than about 2,000 square feet.

If you already own your home, you can also get funding to upgrade it. The Single Family Housing Repair Loans and Grants target very low-income rural homeowners. This funding is for improvements, modernization or removal of health or safety hazards in your home. Applicants can receive up to $27,500 in total assistance between loans and grants with a 1% fixed interest rate. You must also be 62 years or older to apply.

Who qualifies for a USDA loan?

Before you can get any USDA loan, you’ll have to prove that you can’t get a home loan elsewhere, are U.S. citizen and can pay off the debt you’re taking on. You must also be in one of the approved locations. You can check your eligibility using the USDA map. The financial limitations you need to fall under also depend on the area, so check your local income limits.

For guaranteed loans, your household can’t make more than 115% of the median household income. For direct loans, your household can’t make more than the low-income limit for your area. Furthermore, you have to occupy the property as your primary residence to receive any USDA home loan.

Tip: For your future home to qualify for a USDA Direct Home Loan, it can’t have an in-ground swimming pool, it can’t be used for income purposes and it must be modestly-sized.

Pros and cons of USDA loans

There are many positives of applying for USDA home loans. First and foremost, the program helps rural borrowers buy a home if they can’t afford a conventional mortgage. T fact that you don’t have to make a down payment is also beneficial. You will also have low interest rates locked in for the life of the loan, which can bring a sigh of relief for anyone who thinks they can’t afford a home.

However, there are also a few things you should consider before taking out a USDA home loan. First, you’ll have to pay for PMI every month until you have paid off 20% of your home. Mortgage insurance can raise your monthly mortgage by up to a couple hundred dollars per month. You must also live in the home; a USDA loan doesn’t apply toward rental or second properties. Furthermore, this type of mortgage isn’t available in all areas.

The final word

Qualifying for a home loan can be difficult if your credit isn’t up to par or you don’t make much money. A USDA home loan can help, even if you have nothing saved up for a down payment. If you’re in a spot to pursue homeownership — and all the responsibility it entails — look into applying for a USDA loan. You might be able to call yourself a homeowner sooner than you think.