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If you are considering buying a home in a rural area, you may be eligible for a USDA loan, depending on your income and other factors. USDA loans do not require a down payment and are often available even if your credit is not good.
Understanding the ins and outs of USDA loans will help you determine the benefits and risks, and whether this type of loan is right for you. Here is what you need to know about USDA loans including eligible people.
What are USDA loans?
USDA loans are mortgages guaranteed by the United States Department of Agriculture. These loans do not require a down payment and come with low interest rates. USDA home loans are designed to help low to moderate income families find housing in rural areas of the country.
The Ministry of Agriculture defines a rural area as an area with fewer than 35,000 inhabitants. Home repair loans are available to help purchase, repair and update existing rural homes, including eliminating any health and safety risk.
In 2019, the Department of Agriculture provided more than 99,000 USDA loan guarantees to families in the United States, Guam, Puerto Rico, and the Virgin Islands.
USDA loans vs conventional loans
Both USDA loans and conventional loans are types of mortgages available to finance the purchase of a home. The main difference between these loans is that the federal government does not support conventional loans. Like VA loans and FHA loans, USDA loans have the backing of the federal government, giving borrowers access to additional benefits.
Conventional loans generally require a 20% down payment, while USDA loans do not require a down payment. Interest rates for USDA loans are often comparable or lower than those for conventional loans.
Borrowers who do not meet the down payment requirements for a conventional loan may be required to purchase private mortgage insurance, or PMI. USDA loans do not require you to purchase mortgage insurance, although some types of USDA loans come with an annual guarantee fee.
If you are looking for a mortgage, Credible allows you to compare mortgage rates in a place.
USDA loans vs FHA loans
Both USDA loans and FHA loans are government guaranteed loans. The Department of Agriculture supports USDA loans, while the Federal Housing Authority guarantees FHA loans.
These loans differ in some ways:
- Down payment conditions – USDA loans do not require a down payment. But FHA loans require a down payment of 3.5% (if your credit score is 580 or higher) or 10% (if your credit score is between 500 and 579).
- Credit score requirements – The minimum credit scores required also vary among USDA loans. For an FHA loan, your score can be as low as 500, provided you have a 10% down payment.
- Mortgage insurance – FHA loans also come with expensive initial mortgage insurance premiums, typically 1.75% of the loan amount. You will also pay an additional annual mortgage insurance premium in monthly installments, typically between 0.45% and 1.05% of the loan amount, over the life of the loan. In some cases, you can also pay an insurance premium on USDA loans if you don’t make a down payment.
- Borrowing limits – There are no defined loan limits for USDA loans – USDA sets a maximum amount for each borrower based on their eligibility. As of 2021, FHA loan limits vary by county and range from $ 356,362 (low cost counties) to $ 822,375 (high cost counties).
How Do USDA Loan Programs Work?
There are three types of USDA loans available to people who want to buy or repair a single family home in small towns. Each loan works differently, but they are all designed to provide home ownership to those who do not qualify for traditional mortgages. USDA loans can also strengthen the economy and the quality of life in rural America.
The US Department of Agriculture provides or guarantees USDA loans directly. Eligibility for these loans is based on income and varies based on the average median household income for each designated area. The loan repayment term varies from 20 to 38 years, depending on the type of loan. Only properties meeting USDA guidelines are eligible for loans, which are generally limited to single family homes of modest size.
Low interest rates are another indicator of USDA loans, which means borrowers are unlikely to pay as much interest over the life of the loan.
USDA loans do not require deposit, which can allow you to buy a house without saving thousands of dollars up front. But that doesn’t mean that there aren’t additional costs associated with a USDA loan. Borrowers with USDA guaranteed loans must pay a loan guarantee fee of 1% of the amount borrowed. Secured loans also come with an annual fee of 0.35% of the loan balance. USDA Direct loans do not require mortgage insurance.
What are the advantages of USDA loans?
Here are some benefits to consider when deciding if a USDA loan is right for you.
- No deposit – USDA loans do not require a down payment.
- Low fixed interest rate – USDA loans come with low fixed interest rates that are competitive or lower than other types of mortgages.
- Flexible requirements – USDA’s underwriting guidelines are more flexible than traditional lenders, with no specific credit score requirement to qualify.
- Closing costs – You can choose to build the loan guarantee fees into your loan instead of paying them up front.
- No early repayment penalty – There is no prepayment penalty if you pay off your USDA loan before the end of the term.
- Fund repairs – You can take out a USDA loan to finance repairs to your existing home to update it and meet current safety standards.
- Buy or refinance – You can use a USDA loan to buy a home or to refinance an existing mortgage.
What are the conditions for USDA loans?
Although the requirements vary depending on the location and type of loan, here are some of the general requirements that you will need to meet if you want to qualify for a USDA loan.
- Principal residence – The house you buy with a USDA loan must be your primary residence.
- Credit score – There is no specific credit score requirement to be eligible for USDA loans. Your credit and payment history is used to determine your ability to repay the loan. Borrowers with a credit score above 640 should have an easier time qualifying, provided they meet the other loan conditions.
- Income limits – For USDA loan guarantees, your income should not exceed 115% of median household income. You will need to provide documents proving at least one year of income and two years of income if you are self-employed.
- Debt – Your debt ratio, including the new mortgage payment, should be less than 41% of your gross monthly income, although you may still qualify if it doesn’t.
- Place – Where you plan to buy a home plays an important role in USDA loan eligibility. You can check if your region is eligible on the USDA website.
- Citizenship Status – You must be a U.S. citizen, non-citizen U.S. citizen, or qualified alien to be eligible for a USDA loan.
USDA loans may also be subject to state and local regulations, so research your area before applying for a loan.
Credible allows you compare mortgage rates to see what types of loans you may be eligible for.
How do I apply for a USDA loan?
You can apply for a USDA loan through the Department of Agriculture website or find an approved lender in your area (for loan guarantees). You may be asked to provide personal and financial information, including:
- Full Name
- Physical address
- Phone number
- Date of Birth
- Social Security number
- Annual revenue
- Employment history
- Property information
Lenders use information such as your credit score, payment history, credit usage, and the age of credit accounts when considering a loan. The processing times for loan applications depend on the availability of financing and the lender.
Types of USDA Loans
Three types of home loans are available from the Ministry of Agriculture, each with its own eligibility requirements.
USDA Direct Loan
Direct home loans for single-family dwellings are received directly from the Ministry of Agriculture. Low-income borrowers in rural areas can use a direct loan to buy, build, repair, renovate or relocate a house in designated rural areas.
USDA Secured Loan
With the Secured Loans for Single Family Home Loans program, USDA loans are available from approved private lenders with USDA support. Interest rates vary depending on the lender.
USDA Home Improvement Loans and Grants
Single Family Home Repair Loans are designed to help very low income families repair and upgrade their existing homes in designated rural areas. Grants are also available for low-income seniors who need to repair their homes to eliminate any safety or health hazard.
Is a USDA Loan Right for You?
If you live or plan to live in what is considered a rural area and have low or moderate income, a USDA loan can be a great way to buy a home. A USDA loan is especially useful if you don’t qualify for a mortgage through traditional methods and don’t have a 20% down payment.
If you do not qualify for a USDA loan, you may still be eligible for other types of mortgages. It’s important to research your mortgage options and shop around for the best mortgage for your situation.
You can compare mortgage rates and lenders using Credible.