You might think that if you’re looking to buy a home, there are only two types of mortgages that you can get — either a conventional loan or an FHA loan. It makes sense that this might be your thinking, as these are the two most popular types of mortgages available.
If you’re living in a low- or moderate-income household and are looking to buy in a rural or suburban area, though, you might have another mortgage option — a USDA loan. Backed by the United States Department of Agriculture, USDA loans are offered to give qualified homebuyers “the opportunity to own adequate, modest, decent, safe and sanity dwellings as their primary residence,” according to the department.
The program offers many benefits to borrowers, including no down payment requirements and lower interest rates. Unlike some other types of mortgages, USDA loans have two qualification aspects. Both the borrower and the home itself must meet certain specifications in order to qualify for a USDA loan.
Let’s take a look at all the details of USDA loans, including their benefits, the qualifications, and how they work, to see if this type of home loan might be for you.
How USDA Loans Work
Just like FHA loans, the government guarantees a majority of the USDA loan (90%), which gives lenders extra confidence that, even if the borrower defaults on the payments, they won’t take too much of a loss. In return, borrowers who may not be able to qualify for a conventional loan are able to qualify for a loan product that is better for their situation.
USDA loans take into consideration two main factors when determining eligibility — whether a borrower meets the requirements and whether the home itself meets the requirements of the program (more on that in a bit).
For those who are eligible for the program, they will receive the benefit of having no down payment required, and typically lower interest rates as compared to other no down payment or zero down payment programs. You can expect to pay an upfront Guarantee Fee of 1% of the total of the loan and an annual 0.35% fee that will be paid monthly over the life of the loan.
If you already have a USDA loan, you may also be eligible to refinance to lower your interest rate and save on your monthly payment, or even cash out if you have equity in your home to make home repairs and other improvements.
The Qualifications for USDA Loan Borrowers
The USDA will use a number of factors when determining whether you are eligible to participate in the USDA loan program. The first factor is you must be a U.S. citizen, a U.S. non-citizen national, or a qualified alien, and you must personally occupy the house you are financing as your primary residence. You must be able to prove two years of steady income through employment.
The USDA requires borrowers to have a credit score of at least 620, though if your score is less than that, you may also qualify — even if you have a limited history of credit. If you have a score above 640, you may qualify for streamlined processing of the loan.
Typically speaking, the USDA wants to see your monthly mortgage payment that includes your principal, interest, taxes and home insurance equate to at the most 29% of your income on a monthly basis. In addition, other debt payments that you must make shouldn’t go above 41% of your monthly income.
Finally, USDA loans are geared toward borrowers that have an adjusted income level that is around or below the low-income limit for where they live in the country. The USDA income limits listed by county are posted on the department’s website and are broken down by the number of people in the household as well.
The Qualifications for USDA Loan Homes
The next step to the qualification process is finding out whether the home you are looking to purchase fits under the USDA loan program. The idea behind the USDA loan program is to help borrowers who are purchasing a home in a rural area of the country, but the good news is that a majority of the country is actually considered “rural” under the program.
Typically speaking, to qualify for a USDA loan, your home must not be located near an urban area and must have a population of 20,000 or less low- and/or middle-income residents. Just like the income limits, the USDA publishes a property eligibility list on its website as well, where you can actually search a specific address to see if it qualifies.
An inspection of the home will be done during the appraisal process to make sure the home is in good condition. Some of these requirements include that all windows must be working and in good condition, all exterior doors have to have locks that work, there can’t be any cracks or moisture in the foundation, and the electric and plumbing must not have any visible issues and be in good working condition. The property needs to meet HUD minimum standards.
Basically, the USDA just wants to ensure that the home you are financing through the loan program isn’t in disrepair and can be lived in safely without major work beforehand.
Work with a Mortgage Expert to See if You Qualify
If you are planning to purchase a home outside an urban area, then the USDA loan program might be right for you. To figure out whether you and your home qualify, though, it’s important to work with a mortgage professional who can walk you through each stage of the process.
At Embrace Home Loans, our mortgage experts have over 35 years of experience working with borrowers who wish to secure a USDA loan. Contact us today at 888.907.6261