What is a USDA mortgage? What types of loan programs are available and who can take advantage of these programs? This article gives a quick revisit of the USDA mortgage program basics and its acquisition process.
Real estate site Zillow says that a typical American home costs an average of $220,700. Last year, this average was 6.9 percent lower and is predicted to increase by 3.1 percent next year. Meanwhile, experts expect mortgage interest rates to continue its march forward. If the trajectory of both factors don’t change soon, most home buyers in the country can easily be priced out from the already scarce inventory of available homes. This pushes them to rethink their options and look for potential alternative solutions.
They can either:
- Delay home buying or continue to rent and save some more until they can afford a decent down payment.
- Move their location preference from areas where prices are high (typically within cities) to to rural and suburban communities.
- Look for cheap down payment options.
If you are willing to move and are considering the last two paths, then the USDA’s mortgage programs may just be the solution you need.Get today’s rates!
USDA home loan basics
A USDA mortgage is a zero down payment home loan program for eligible rural and suburban homebuyers. They aim to especially help economically challenged individuals and those who cannot obtain a traditional mortgage.
USDA loans come in many forms. Here’s a breakdown of the purpose of each program:
USDA loan guarantees. This program guarantees loans issued by you local lenders which allows them to originate loans at a lower interest rate even without down payment. The borrower would however need to pay for a mortgage insurance premium even if he or she pays any down payment amount.
USDA direct loans. These range of programs is specifically designed for low-to-moderate income borrowers. The average income for every area is used as basis for evaluating eligible applicants.
USDA home improvement loans and grants. If you need financing for the repair and improvement of your home, you can take advantage of these programs.
Qualifying for a USDA-backed mortgage guarantee entails meeting the income limits set by the department. These limits vary by location and the size of the household. You can find the limits for you county here.
Apart from this, the borrower must:
- Use the home as his or her primary residence
- Be a US citizen
- Have a resulting mortgage payment not exceeding 29 percent of his or her monthly income
- Have a sum total of other debt obligations not exceeding 41 percent of one’s monthly income (a higher debt-to-income ratio is permitted if the borrower has good credit)
- Be able to demonstrate income dependability for at least the last 2 years
- Have a good credit history
And more importantly, the property must be located in an area designated by the USDA as rural. Check out the USDA’s map for these areas.Need a lender? We can help you out.
The USDA home loan acquisition process:
- Prequalify for the program. This allows you to get an estimate of how much you can afford allowing you to narrow down your options. This step also helps you determine your eligibility.
- Get pre-approved. A more thorough process than pre-qualification, this stage takes account the important qualification documents. A pre-approval letter also helps you make stronger bids and gives your seller the impression that you’re serious about your intention to buy the home.
- Make your offer. Inform your lender that you’re using the USDA loan program in order to arrange the offer. If you want to take advantage of the 100 percent financing feature, you can negotiate with the seller so that they would shoulder the costs of closing. However, if you can’t arrive at these terms, you have to pay the costs out-of-pocket or via gift down payments from family members.
- Processing and closing. To ensure that the property meets the standards set by the department, a home inspection must be done. Once you are under contract, an underwriter will review your information. If all goes well, you will get your approval and a closing date is set. Before you sign your name on the dotted line, make sure you read and understand every detail of the contract.
With the current market factors affecting affordability for many homebuyers, programs such as the USDA’s mortgage home loan is a great financing choice for those who have limited options.Click to See the Latest Mortgage Rates»