USDA Loan: What It Is, Eligibility, and How to Apply
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If you prefer farmland to skyscrapers and the sounds of nature to traffic noise, a special type of government-backed funding could help you make a rural location your permanent home.
United States Department of Agriculture (USDA) loans are tailor-made for very low-to-moderate income households who cannot obtain conventional financing and wish to enjoy the stability of home ownership.
Here’s what you need to know about USDA loans, including how to get one:
What is a USDA loan?
A USDA loan can help you buy, repair, renovate, build, or even relocate a home to use as your primary residence. In most cases, you are not required to pay a deposit.
If you have a low to moderate income and want to own a home in an area with less than 35,000 people, you may consider a USDA loan.
Learn more: USDA vs. FHA Loans: What’s the Difference?
How does a USDA loan work?
USDA loans work a little differently depending on the type of USDA loan you get. You can choose from three USDA home loan programs:
- USDA Guaranteed Loans: These loans are 30-year fixed rate loans issued and funded by USDA mortgage lenders, who determine the interest rates. The USDA guarantees 90% of the loan amount to protect the lender if you do not repay the loan. The income limits for secured loans are higher than the limits for direct loans.
- USDA Direct Loans: These loans are underwritten and managed by the USDA. They can have terms of up to 38 years and interest rates as low as 1%. To qualify, you must have low or very low income for your area, not qualify for other funding, and be without decent, safe, and healthy housing.
- USDA Home Improvement Loans: Very low-income homeowners who cannot get other credit can borrow up to $20,000 at 1% interest to repair, improve or modernize a home in a rural area.
This article will focus on secured and direct loans.
Although Credible does not offer USDA loans, we can help you find a great rate on a conventional loan. It’s simple and secure — and you don’t even have to leave our platform.
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USDA Loan Eligibility
You will need to meet certain eligibility requirements to qualify for a USDA loan.
USDA Eligible Areas
USDA guaranteed and direct loans are available in areas with fewer than 10,000 people and sometimes in areas with 10,000 to 35,000 people.
Look up the address of a home you’re interested in on the USDA Eligibility site to see if the home is located in an eligible area.
USDA Property Eligibility
You must occupy the accommodation as your principal residence. It can be an adjoining or detached single-family home. Manufactured homes are also eligible.
It must be accessible by all-weather public streets maintained by the local government or homeowners association, have a safe and adequate water supply, and have a sanitary sewage disposal system.
The square footage of the property must also meet USDA requirements:
- Guaranteed: No specific square footage requirements, except for a manufactured home, which must be at least 400 square feet.
- Direct: Usually 400 to 2,000 square feet of living space (not including basements). Properties also generally cannot have an in-ground pool.
USDA loan income requirements
USDA loans are unique in that you can actually be disqualified if you earn too much. USDA loan income limits vary depending on whether you are applying for a guaranteed or direct loan.
- Guaranteed: You cannot earn more than 115% of the region’s median income. You also cannot qualify for a conventional loan without private mortgage insurance (PMI).
- Direct: You must be considered to have low or very low income. Check the USDA Direct Lending Limit Charts for your area. However, if you do not have sufficient income, you may be eligible for grants as long as you can contribute 24% of your income towards your housing payment.
Both loans are adjusted based on location and family size. They also require you to have a stable income history that should continue. Also, you can’t have too much debt in relation to your income. The maximum debt-to-income ratio (DTI) for a USDA loan is 41%.
Find: 5 types of mortgage loans: which one is right for you?
USDA Loan Credit Score Requirements
USDA direct and guaranteed loans have no minimum credit score requirement. You can even qualify without a score. Lenders will consider your payment history on things that may not show up on your credit report, such as lease payments.
It may be easier to qualify if your score is at least 640. However, under USDA lending rules, lenders cannot reject you based on your credit score.
USDA loan interest rate
For a USDA secured loan, lenders decide what interest rate to offer you, but the rate must be fixed and the term must be 30 years. Shopping around with multiple lenders can help you get a better rate.
For a USDA direct loan, you can learn more about current rates on the USDA direct loan webpage. Since January 1, 2022, the rate is 2.50% for low and very low income borrowers. Your actual interest rate will be based on market rates and whether you qualify for payment assistance, which can reduce your rate to as low as 1%. Most direct loans have fixed terms of 33 years.
How to Get a USDA Loan
The first steps towards obtaining a USDA loan depend on the type of USDA loan you want:
- If you are looking for a secured loan: The USDA Approved Lenders list is a good place to start. Keep in mind that “approved” is not the same as “recommended”. You should always choose your lender carefully and apply to multiple lenders to find the best deal.
- If you are looking for a direct loan: You don’t need to find a lender; you will apply for USDA Rural Development. This government agency is your lender. Start by completing the USDA Single Family Housing Self-Assessment. If you seem like a good candidate, you can submit a full application through your local USDA service center.
Once you have chosen a loan, the process is similar to any other mortgage process:
- Complete the loan application. You will provide your name, address, phone number, email address, social security number and the address of the property you wish to purchase. You’ll also provide information about your monthly income, monthly debt repayments, and assets, as well as whether you’re overdue or defaulted on debts or have a history of foreclosure.
- Get your loan estimate. If you can be pre-approved based on the information you provided, you will get an official loan estimate showing the interest rate, fees, and mortgage term that the lender is willing to offer you.
- Compare loan offers. If you are applying for a secured loan, compare your loan estimates from each lender who has pre-approved your application. Decide which offer is right for you, then let the lender know you want to continue. You will only get one offer with a direct loan, since the USDA is the only lender.
- Go through the subscription. Once you have committed to a lender, the underwriter will verify your application information and may request additional details and documents. An appraiser will verify that the house is worth the amount agreed between you and the seller. Finally, a title company will ensure that the title to the property is clean.
- Close your loan. Closing is the last step in the process. Here you will carefully review and sign your closing statement and pay closing costs. Your lender will pay the seller, you will get the keys to your property and you will officially become the owner.
It is also possible that the lender rejects your request. If this happens, ask the lender to explain why. This way you will know what you need to change to be approved the next time you apply.