Updated January 2018
Over the years, USDA Rural Development through its housing loan programs has been able to assist millions of Americans buy homes at highly flexible and affordable interest rates and mortgage terms.
USDA Loan Programs for Homebuyers
USDA offers two excellent loan programs with great low fixed rates for helping home buyers in rural areas. The requirements and guidelines for both the programs are quite flexible and accommodating. Read through the overviews presented below and choose the best program that best suits you and your family.
USDA Guaranteed Loans
A USDA guaranteed loan makes it extremely affordable for buyers of single-family homes in eligible rural areas around the country. The flexible and extremely generous USDA guidelines are aimed at helping lower to middle income rural families achieve their American Dream of owning their own home. If you qualify, you can take advantage of the numerous benefits associated with USDA home loans.
Under this USDA loan program, approved lenders can provide financing up to 100% of the purchase price to eligible home buyers on properties located in rural areas. The property eligibility depends on the type of dwelling and its condition. Safe and sanitary single homes should be able to easily meet the required criteria for properties.
USDA Loan Property Eligibility
The single-family home must be in an area classified by the USDA as “rural”. Once the property eligibility is met, a prospective home buyer must meet the income conditions. To get a USDA guaranteed loan, the entire household income must not exceed the limits established for the rural area where the property is located. In addition to the mandatory property and income criteria, a number of other steps must be taken to qualify.
Most rural home buyers opt for USDA home loans because they enable them to purchase a home without any down payment The entire 100% of purchase price can be financed along with the guarantee fee. The mandatory USDA loan guarantee fee can be rolled into the mortgage loan amount as long as the appraisal value of the property supports the purchase price plus the fee amount. It can be said that USDA loans remain the true no-down-payment loan programs for single-family homeowners right now.
Unlike conventional home loans underwritten by lenders working with Fannie Mae and Freddie Mac, a loan guaranteed by USDA allows for extremely easy credit qualifying requirements. A buyer without sufficient credit history may also use non-traditional sources of credit history to establish their creditworthiness.
The rate and terms on a USDA guaranteed loan are quite simple. Unlike the wide range of confusing and complex loan programs from traditional residential mortgage lenders, a USDA loan is always a 30-year fixed rate loan. The interest rates are generally comparable to the prevailing market rates for 30-year loans.
Debt to Income Ratios
USDA requires total debt-to-income (DTI) payment ratio to not exceed 41% of the borrower’s income. The portion of income going toward housing expenses must also not exceed 29% of the household’s gross income. USDA does allow lenders to extend loans to rural home buyers with higher DTI ratios, provided there are compensating factors to justify such an exception to the guidelines.
The maximum loan amount that can be guaranteed depends on the debt ratios and eligible income. A USDA lender may approve a loan as long as these numbers stay within the limits after factoring for the purchase price. If your income justifies a higher purchase price, definitely go for it.
In addition to existing residential dwellings, newly constructed homes, planned unit developments (PUDs), condos modular and manufactured homes are eligible for a USDA loan. The amount required to make eligible repairs and improvements may also be rolled into the loan. Closing costs including the guarantee fee can be added to the final loan amount as long as the appraisal value comes in at a sufficient level to account for the additions.
Seller concessions along with grants and gifts are allowed in most of the cases. In addition to first-time homebuyers, repeat homeowners are also eligible for a USDA guaranteed rural home loan.
To get started, make sure your income falls within the designated limits for the area in which the property you intend to purchase is located. After that, contact a local USDA-approved lender to get pre-approved for a loan.
USDA Direct Loans
In addition to guaranteeing rural home loans made by approved lenders, USDA provides housing loans directly to low or very low income individuals and households buying properties in rural areas. These USDA direct home loans serve a number of purposes such as for building, repairing, renovating, or relocating an existing home, or for purchasing and getting the site ready for a home.
Who is Eligible for USDA Direct Loans
In order to qualify for a direct loan from USDA, the applicant must either have a low or very low income. He or she is considered in the very-low-income group if his or her income is within 30 to 50% of the prevailing median income for that area. To belong to the low-income group, the borrower’s income should fall in the 50 to 80 percent range of the AMI.
The income limits set by USDA for the direct loan program can be found on the Rural Development website.
Families must be able to afford the new mortgage payments, including taxes and insurance premiums. An applicant must go through an income and credit check to qualify for a direct loan, although payment subsidies and extended terms are offered for applicants with insufficient funds. A low-income borrower who has difficulty obtaining credit financing or finding access to a safe and decent housing despite having reasonable credit history can apply for a USDA direct loan to purchase a new home in an eligible rural area.
Standard 502 Loan Terms
The USDA standard 502 loans allow 33-year and 38-year extended loan terms depending on the income and capability of the borrower. For instance, borrowers whose income is less than 60% of the AMI and unable to afford 33-year payments, may opt for 38-year loan terms. Unlike guaranteed loans, direct loans carry interest rates that are based on the government’s cost of funds. The payment subsidies offered by USDA can help lower the amount of money that a borrower pays monthly. For manufactured homes, the maximum allowable loan term is 30 years.
USDA Direct Loan Property Eligibility Standards
The residential property must be modest in all aspects. Its design, size and cost must be considered modest for the local area, and the value must be less than area’s loan limit. The house must also not have any features disallowed according to USDA property guidelines. All homes to be financed must meet the state’s relevant building codes, with manufactured homes meeting HUD standards as well.