USDA loan offers lower mortgage rates and monthly payments. Learn the steps to get approved.
So what is a USDA loan? When you think about the United States Department of Agriculture, what comes to mind? Farms? Milk? The food pyramid? Of course. But did you know that they also provide home loans? Maybe you did but figured that they were just for farmers. The USDA's real vision is to provide economic opportunity to assist the people who live in rural America to thrive.
National USDA loans is here to help families find a path to home ownership. Often, people who qualify for these mortgages have no idea they exist and have long given up on their dream of owning their own home. Let's take a closer look at what the program is, who it's best for, and determine if you might be eligible.
What is the USDA?
The United States Department of Agriculture was signed into legislation by Abraham Lincoln on May 15, 1862. Back then, over half of the people living in the United States lived or worked on a farm. The USDA was known then as the "People's Department," and President Lincoln envisioned the agency as one who touched American lives on a daily basis. Today it is made up of 29 agencies and employs almost 100,000 people. The USDA states that its mission is to "provide economic opportunity through innovation, helping rural America to thrive…" They cover many areas of interest, including Farm Production, Food and Nutrition, Food Safety, Marketing Regulatory Programs, and more. Rural Development is the USDA agency that works to offer loans and loan guarantees to eligible applicants. Their loan portfolio stands at over $216 billion.
What is a USDA Home Loan?
Suppose you prefer the quiet of country living over a major metropolitan area's bustling energy. In that case, you might want to consider a USDA loan. Also known as a rural development loan, the USDA created this program to make home ownership more affordable to those
interested in rural areas. Much like a VA loan, the government guarantees this loan on behalf of a lender. That way, if you fail to repay the mortgage and go into foreclosure, the lender can recoup some of its losses from the government. As a result, a lender can offer home loans to eligible borrowers with little to no money down and other benefits.
How Does it Compare to Other Mortgages?
USDA loans are very different from FHA and conventional financing options. There are no limits to how much house you can buy with a conventional mortgage, where it's located, or in what condition. However, you pay for that amount of freedom with a 20% down payment and a good credit history. Remember that when you borrow money to buy your house, a bank is putting forth hundreds of thousands of dollars solely on the faith that you will pay it back. And with conventional financing, they have no added protection if you default on your loan. That's why lenders try to be as sure as possible that you can complete the terms of the loan agreement. In other words, they want to see you as a low credit risk.
FHA loans are much more lenient, only requiring a 3.5% down payment and the ability to qualify even with poor credit. You are also subject to regulations on how much money you can borrow (known as loan limits). However, there are no limits to how much you can earn to qualify. These loans are insured by a government agency known as the Federal Housing Administration. Suppose you wind up in foreclosure with an FHA loan. Your lender can put in a claim and for the difference between what the house sells for in foreclosure and any outstanding loan principal. Because of that, lenders are willing to loan money to people that are considered a higher credit risk.
USDA home loans are similar to FHA loans in that they are backed by the Department of Agriculture the same way the Federal Housing administration supports theirs. However, this program helps low-to-moderate income families purchase a home located in specific rural areas of the country. Therefore, strict guidelines surrounding income limits, property requirements, and property locations are needed. In return for meeting these guidelines, borrowers get access to unique
benefits such as low or no down payments and lower interest rates.
What are the Benefits?
If you meet the qualifications for a USDA home loan, the benefits are worth taking advantage of. Let's take a closer look at some of the most important ways the USDA home loan program makes it easy for those of modest income to purchase a home of their own.
No Down Payment Required
The no down payment requirement is the number one reason most people gravitate toward a USDA loan. Saving money for a down payment is not an easy feat. The average price of homes sold in the United States in 2019 was
$234,000. How long do you think it would take to save up $46,000 (20% down payment) or even $23,000 (10% down payment)? With a USDA mortgage, you can finance 100% of the cost of your potential new home, which means you can start paying money toward owning your own piece of property much sooner, building equity in your own home.
Low Fixed Interest Rates
With conventional financing, you need to come up with that 20% down payment to qualify for the best interest rates. USDA mortgages offer borrowers the opportunity to be eligible for a low-interest rate even when financing 100% of your home's cost. Just a one-half percent difference could add or save thousands of dollars over a 30-year loan term. Also, a fixed interest rate offers security in knowing exactly how much your payment will be every month through the life of the loan.
Relaxed Credit and Income Requirements
As long as you have a credit score of at least 640 and a debt-to-income ratio under 41%, you can qualify for a USDA home loan and a low-interest rate. Even if you could get approved for conventional financing with those parameters, the interest rate would be much higher, increasing the cost you'd pay for the loan. As long as you meet those two
requirements, the approval process should go relatively quickly as the guidelines are very streamlined.
USDA Loan Guidelines
By helping people settle down in rural areas, USDA loans help ease the congestion found in large cities and foster economic growth in outlying communities. There are firm guidelines that need to be met in support of these values before you can obtain a USDA home loan.
What is the Definition of Rural?
You may be thinking that the benefits sound great, but do you want to live out in the middle of nowhere? You'll be happy to know that the word rural is a loose term when it comes to property eligibility for USDA backed home loans. In fact, 97% of the United States is considered eligible for USDA approved financing. For example, while you couldn't use this program to purchase a home in downtown Chicago, there are several suburbs outside the city that would be eligible. You can look on this map created by the USDA to see if the address your considering is eligible for USDA financing.
To be eligible for a USDA loan, the home in question must be your primary residence. You are not allowed to finance a second home, or vacation home, using this program. Also, since the government is essentially backing your loan on behalf of the lending institution, it has a vested interest in the property's condition. Therefore, the USDA requires the house to meet HUD minimum safety standards for financing to be approved. These standards include but are not limited to windows, doors, gutters and downspouts, paint, wallpaper, kitchen cabinets, flooring, and more. If you are building a new house, everything must meet or exceed current acceptable building codes. The house's foundation needs to be structurally sound and accessible from a paved road.
You will need to meet specific income limits if you are interested in obtaining a USDA home loan. The government determines your income eligibility based on the size of your household and where you live. For a family of between one and four people, your income is not allowed to exceed the median household income of any geographic location by more than 15%. However, more income is allowable for families of five or more. If you live in Dayton, Ohio, the income limit for a 1-4 person household is $90,300 per year. If your home consists of 6 members, you can earn up to $119,200. Limits in other areas where the median income is higher results in a higher limit. In San Francisco, California, a 1-4 person household can earn upwards of $223,800 and still qualify. The USDA website has a comprehensive calculator available to see if you meet income requirements for the area you're looking to purchase.
So, What's the Catch?
While there is no catch per se, there are some things to keep in mind if you decide on the USDA route. Above and beyond the geographic restrictions and income limits, you can only purchase a single-family, owner-occupied home. You can't buy a duplex or a triple-decker and expect to rent out the other units. There is also the mortgage insurance to consider.
For most people, mortgage insurance is simply a necessary part of buying a home with little or no money down. The only way that you won't pay any type of mortgage insurance is if you can swing a conventional loan and put down 20% of the home cost. Because the government backs your USDA mortgage, an initial mortgage insurance premium of 1% of the loan value is required. You will also have to pay an additional .35% of the loan value annually spread out over 12 monthly payments. So, if your loan is for $150,000, your initial mortgage insurance premium will be $1,500, with an additional $43.75 added onto your monthly payment. While it is adjusted each year based on your outstanding principal, mortgage insurance never goes away on a USDA loan. You pay it through the entire term.
How Do I Know If It's Right for Me?
A USDA loan may be a fantastic choice if you bring in a modest but steady income and are interested in living outside a major city. We like to believe there is a mortgage out there for almost anyone. Reading articles such as this one is a great way to learn about the different types of loans, but your mortgage broker or lender should also a valuable resource. They'll review your financial situation and go over the options that suit you best. Our specialists at Community First National Bank are highly knowledgeable. They are always ready to see if a USDA loan is right for you. Give us a call today at (855) 923-5041, or visit our website and start your application online.
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