After the housing crisis in 2008, mortgage underwriting guidelines changed dramatically, which has made it increasingly more and more difficult for many people to get loan approvals. Prior to this, it was quite common for homebuyers to finance 100% of the purchase price of a house.
As underwriting guidelines have tightened up, however, these no money down mortgages have virtually disappeared.
Fortunately, if you’re interested in owning a home where you are surrounded by more greenery than buildings, you may be eligible for a USDA Loan. Also known as Rural Housing Loans or Section 502 Loans, they are becoming increasingly popular since they have lower interest rates than conventional mortgages, and can be used to finance up to 100% of the purchase price of a property.
Here’s everything you need to know about USDA loans.
What Is A USDA Home Loan?
The U.S. Department of Agriculture (USDA) Mortgage Program started in 1949, and was designed to help homebuyers who couldn’t qualify for a conventional mortgage.
A USDA loan is a zero-down-payment mortgage issued through the USDA Rural Development Guaranteed Housing Loan Program, which targets rural and suburban homebuyers. What’s more, you can qualify for a USDA loan with a FICO credit score below 640.
USDA loans are available in three forms:
- Loan Guarantees – These are loans issued by private lenders and backed by USDA. This helps to ensure that you enjoy low mortgage interest rates, even if you’ve put no money down. Keep in mind that you may be required to pay mortgage insurance if you don’t put at least 20% down, however.
- Direct Loans – If you don’t have adequate housing and your income is below 50% of your region’s median income, you may be eligible for a direct loan, provided you can make the monthly mortgage payments. Direct loans are issued directly by the USDA, and have some of the lowest interest rates on the market.
- Home Improvement Loans and Grants – If you are looking to upgrade or repair your home, but you can’t get affordable financing elsewhere and your income is less than 50% of your region’s median income, you may be eligible for a loan of up to $27,500 or a grant of up to $7,500. You have to be at least 62 years old to qualify for a grant, however.
While Embrace Home Loans does not offer USDA direct loans or home improvement loans/grants, we are pleased to issue guaranteed loans.
Benefits of a USDA Loan
With a USDA loan, you’ll enjoy advantageous interest rates and loan terms since lenders are willing to take on more risk due to the USDA guarantee. The main benefits of a USDA mortgage include:
- No down payment. In comparison, you’re required to put at least 3.5% down for an FHA loan and 5% for a conventional mortgage (though some conventional programs only require 3% down).
- Interest rates are much lower than conventional home loans
- Low monthly mortgage insurance payments
- Flexible credit requirements
There are 2 types of loan terms for USDA loans: a 15-year fixed interest rate and a 30-year fixed interest rate. Embrace Home Loans only offers 30-year fixed rates. Adjustable rate mortgages (ARMs) are not offered through the USDA.
If you already have a USDA loan, and are interested in refinancing it to a lower interest rate, you are eligible provided your loan closed at least 12 months ago. If you’ve made at least 12 consecutive on-time payments, you may be able to refinance without having to re-verify your income.
Are You Eligible for a USDA Loan?
A common misconception about USDA loans is that they are only available for purchasing farms. The truth is that if you’re interested in buying a home outside of major U.S cities, you may be eligible for a USDA mortgage program. In fact, 97% of the United States is eligible for USDA loans.
The home you plan to buy has to be in a rural area, however. If you live in a city or town with a population below 20,000, you’re well within what USDA considers “rural.” Cities with a population of not more than 35,000 that don’t have mortgage programs available for low and moderate-income families, or that are more rural than urban in character, may also qualify.
Besides geographical location, there are several other requirements you must meet to be eligible for a USDA loan:
- Income Limits – If your income falls below 115% of your area’s median income, you may be eligible for a USDA loan. So, for example, if you live in an area with a median income of $40,000, you could still qualify, even if you earn $46,000. Also, keep in mind that the USDA considers your entire household income. So, if your 17-year-old child is employed, you should declare that income for USDA eligibility purposes. This doesn’t mean that the child’s income will be part of the loan application. The lender will review all your household’s income when determining the maximum loan you qualify for.
- Occupancy – You should be planning to live in the home you are buying for the foreseeable future, since the USDA requires that the home must be your main residence. You will have to look at other mortgage options if you are planning on purchasing a rental property, an investment property, or a second home.
- Debt-to-Income Ratio (DTI) – Your DTI is basically your total debt figure divided by your pre-tax income. The standard DTI ratio for a USDA loan is 29%/41%. The 29% represents the ratio of your monthly housing debt (including principal, real estate taxes, interest, and insurance) to your pre-tax monthly income. The 41% represents your total debt ratio, which includes your housing payment, personal loan payments, car loan payments, credit card payments, and student loan payments. You may still qualify for a USDA loan with a higher DTI ratio if you have sufficient compensating factors like a stable work history and substantial cash reserves.
- Citizenship – You must be a U.S citizen or have permanent resident status to qualify for a USDA loan. You may also be eligible if you are a non-citizen national or a qualified alien, but you’ll need to be able to provide valid proof of residency.
- Eligible Properties – Single-family homes, as well as some townhouses and condos, are USDA eligible.
If you’re interested in buying a home downtown in a major U.S. city, a USDA loan is not an option. If your income exceeds your region’s limits, or you can afford a 20% down payment, you won’t be approved for a USDA loan either.
If you’re looking for an easier way to purchase a home in rural and/or suburban areas of the U.S. with zero money down, a USDA loan will likely be the most viable mortgage option.
USDA loans offer 100% financing, competitive interest rates, and low mortgage insurance fees, which make them among the most popular ultra-affordable home loans on the market.