USDA Home Loans: Everything You Need to Know
Have you heard of a USDA Home Loan? Do you know the specific details about it and whether or not you are eligible? Does the thought of living in a rural area interest you? How about getting a good deal on a mortgage? If so, read on for more details.
While city life is ideal for some. There are many of us who prefer the idyllic settings of rural America. The golden rolling plains, overgrown pastures, and forests that seem to safeguard an undisturbed world. If you prefer a life out in the country, then a USDA Home Loan is the perfect opportunity for you to make that dream a reality.
What Is A USDA Home Loan?
A USDA Home Loan is simply a mortgage program that is funded through the United States Department of Agriculture (USDA). The USDA was started in the 1930’s as a part of the “New Deal.” During a time when most rural housing didn’t have running water, plumbing, or electricity. It was an organization that began with the mission of improving the quality of life in rural America. It was founded with the mission of giving every American a “decent home and a suitable living environment.”
Today their rural development program remains perhaps one of the most underutilized mortgage programs in America. Maybe because it’s not as well-known as some of the more popular programs like the Down Payment Assistance or FHA programs. Maybe it’s because people are intimidated by the eligibility requirements. Even if it’s not for you, this is a mortgage product that someone you know could take advantage of.
For over eighty years, the USDA has been helping low to moderate income families all over the country obtain secure, safe, and affordable housing. The USDA, to this day, is still providing affordable housing to Americans with low to moderate income. In fact, they have a portfolio worth over 216 billion in loans and plan to administer over 38 billion in loans in the fiscal year. In 2017 alone they helped 127,000 families get into rural homes. You could be the next family to get up to 100% financing and pay 0% down. It’s one of the most attractive mortgage programs out there, but of course there is a catch.
USDA Rural Development Loan Eligibility
In order to be eligible for a USDA Rural Development Loan you have to fulfill certain requirements. These eligibility requirements were put in place to make sure that families in need were the ones taking advantage of the program. Additionally, these requirements were designed to fulfill the ultimate mission of the USDA, which is to improve the quality of life in Rural America.
To know if you are eligible, first you should consider your economic situation. The USDA requires that anyone applying for a rural home loan show an ability to repay that loan, but fall into the low to moderate income bracket. The exact household income they require will depend on the area that your new property is in and the size of your household.
In most cases if your annual household income is between 29,350 to 86,850 and there are 1-4 persons in your household you are eligible. If your household is larger than your annual income can be larger as well, but should still fall below 114,650.
Keep in mind this should be the total income of everyone living in the home. Some exceptions are places like Robins County in Texas, which has an income limit of 104,800 for a 1-4 person home and 138,350 for a 5-8 person home. If an area is more expensive then the income limit will change to reflect the cost of that area.
The USDA also wants borrowers to demonstrate their ability to repay the loan and they will look to your credit score as an indication of this ability. While there is no set credit score minimum, lenders in most states will provide guidelines on what credit score they wish applicants to possess. Keep in mind that USDA may accommodate lower credit scores than other traditional loan programs.
Also, keep in mind you will not incur a charge for private mortgage insurance with a USDA loan either. Instead, you will be charged 1% upfront fee and will also incur a 0.35% annual funding fee. Both well below guidelines for an FHA loan.
Why Was The USDA Program Created?
Initially, the USDA program was created to improve the living conditions in Rural America so there are some location requirements that come along with a USDA Home Loan. According to the USDA an area can qualify as rural if it has a population less than 20,000, it isn’t contained within a Metropolitan Statistical area, and/or has a lack of mortgage credit for low to moderate income home buyers.
You can visit the USDA website’s eligibility map to find areas around you that are considered rural. Every five years the field offices throughout the country will review the areas that they’re responsible for and make adjustments to the eligibility map. So take advantage while you can because in the next few years eligible locations could change.
If you know the property is in an eligible location and you qualify based on your income, then your closer than ever to a USDA Home Loan. Next you need to consider if you’re ready to make the property your permanent residence.
USDA Home Loan Residency Requirements
One of the conditions for a USDA loan is that the owner occupy the residence. The USDA provides this mortgage option so that families are able to find affordable and safe housing. It’s not an option for borrowers interested in purchasing investment or vacation properties.
So are you ready to move in? Does a USDA loan appeal to you? If so, let’s look at the final eligibility requirements.
USDA Loan Limits
Another limiting factor the USDA needs you to know about is loan limits. Depending on the area your moving into the USDA limits how much you are able to borrow. The loan limitation is based on the markets in the surrounding area. For example, places in California or Hawaii will have a higher loan limit than parts of rural America.
USDA Citizenship Qualifications
Finally, in order to use a USDA Home Loan, you must be a U.S. Citizen, non-citizen national, or qualified Alien. You must be able to show a legal capacity to incur the loan obligation and also show that you have not been suspended or debarred from participation in federal programs.
Someone who has been delinquent on their federal taxes for more than $3,000 or has a violation of the Drug-Free Workplace Act could be suspended from Federal Programs. Commission of Fraud or Embezzlement, Theft, Forgery or an unfair trade act are also examples of a reason that someone could possibly be suspended from programs like this one.
The USDA is looking for honest and reliable individuals to give out their loans to, but that isn’t the only requirement. Like every other Federally funded housing program you are required to purchase mortgage insurance with your home loan.
USDA Home Loan Obligations
Once you’re ready to lock your USDA home loan it will be time to consider the other obligations that come along with most loans. Mortgage insurance is required because every lender wants to be able to protect themselves in case you’re unable to repay your loan. Unless you’re paying 20% down, you won’t be able to avoid getting mortgage insurance.
There are two types of Mortgage Insurance, borrower paid mortgage insurance and lender paid mortgage insurance. In both instances you are purchasing mortgage insurance, but there are some key differences between them.
Borrower paid mortgage insurance is paid by the borrower. If that seems like an option you would prefer to avoid than you can have the lender pay for the mortgage insurance, but be warned it will cause you to have a higher rate over the life of your loan.
With the USDA home loan, the first mortgage insurance premium is paid up front and is one percent of your total loan amount. Then the second is a premium of .35% that is paid over twelve months along with your mortgage payments. Mortgage insurance should be a small price to pay compared to the opportunity of a USDA Home Loan
Low Interest Rates
There are some tremendous benefits that come with a USDA loan. One of the most exciting benefits you’ll be able to take advantage of is lower interest rates. In most cases, USDA rates are lower and more attractive than Conventional mortgage rates or even FHA mortgage rates.
You can discuss with your local lender what the current rates are and if their able to secure you the best deal possible. Rates will often times be around 4%. There are many factors that will affect a mortgage rate such as stock prices, the Federal deficit, and down payment. These can all have an effect on home loan rates.
No Money Down
Another benefit that’s great for anyone looking to purchase a home is the fact that a USDA mortgage allows the borrower the option of putting 0% down on their new home. This means that you shouldn’t be afraid to go house hunting.
There are many first time homebuyers intimated by 20% down and think that home ownership is out of reach for them. Well it isn’t if you are considering a rural home loan. You can always put more than 0% down though, in fact it’s strongly recommended that you be able to put more down than less. This is because your down payment is a factor that will affect your interest rate, but a USDA Home Loan is still a great option for anyone who can’t afford a large down payment.
Compared to FHA and conventional loans the only other mortgage option that allows a buyer to pay 0% down is the VA Loan. VA Loans are only available to military Veterans so if you’re not a veteran a USDA loan is your next best bet to be able to buy a home with 0% Down.
This program makes home buying affordable and accessible. This is exact the purpose of the USDA Home Loan Program. If you are a Low to Moderate Income household and you don’t have money to put down for a home, this can be an amazing option for you.
Fixed Rate Mortgage
USDA loans also allow someone to be able to purchase a home with a 30 Year fixed rate mortgage. This means that you will be able to move into your home and have as little monthly payments as possible.
It also means that over the lifetime of your loan your payments won’t change. This is an attractive option for most first time home buyers who are low income and aren’t able to afford huge monthly payments. A fixed rate mortgage could be right for you if you plan on spending a long time in the home that you buy.
The USDA won’t be the only group helping you on your home loan journey however. Know if you qualify and then contact a local lender to begin the process. Because while the USDA will be the organization that funds the loan. The USDA originally set up the program to “assist approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas.” Your lender and the USDA will have to work together to make your home buying journey a success.
USDA Loans are one of the most attractive options for someone looking to purchase their home in a rural area. They were loans specifically designed to help support the rural community. The USDA is a nationally recognized institution that supports rural areas with more than home loans though. They are on a mission.
According to their website to “promote economic development by supporting loans to businesses through banks, credit unions and community-managed lending pools. We offer technical assistance and information to help agricultural producers and cooperatives get started and improve the effectiveness of their operations.”
Is A USDA Home Loan Right For Your Family?
If you are a person who loves rural life, a first time home buyer who doesn’t have 20% to put down on a home or if you are a borrower who has decent credit and wants an alternative option to FHA or conventional mortgages, then a USDA loan could be perfect for you.
The USDA created this program for families who don’t have a lot of options on their plate, but everyone should be considering this option seriously. Talk to your local mortgage lender about your USDA options today.
Additional USDA Home Loan Resources
U.S. Rural Development Program