What is a USDA Loan?
Not a fan of the city but prefer somewhere quieter? If your ideal location is away from the crowds and the hustle and bustle of city streets, the United States Department of Agriculture (USDA) might just be able to help turn your dream into reality, with its USDA mortgage program.
Also known as the USDA Rural Development Guaranteed Housing Loan Program, this home loan is designed for rural property owners. The program was introduced by the Federal Government in 1949 through the section 502(h) of the Housing Act of the same year; which explains why the loan is at times referred to as the "Section 502" loan.
Forget it many names, the important thing to know is how it can get you into your own property without putting any money down.
How Do USDA Loans Work?
A USDA loan is pretty simple. Eligible borrowers looking to purchase a home in rural and suburban areas can apply for a mortgage loan through this program. If the location of your house is in an approved area, the Federal Government backs the loan through the USDA and gives lenders extra security against borrowers defaulting.
Since lenders are taking on less risk, they are able to offer lower interest rates and extend more credit to borrowers.
This program was created to help people with the greatest need for housing, including individuals or families who do not have a safe or decent home, or do not qualify for conventional loans.
If you’re looking at a house that you think may qualify, talk to an approved lender for more information. Even though the loan is backed by the USDA, they are not directly offered by the government. You will still have to apply from a financial lender.
Here at TJC Mortgage, we know it all starts with a home loan and would be more than happy to see if you quality for up to 100% funding. We’ll work together to look at your credit history and financial health to see what your best option is.
Types of USDA Loans
- Guaranteed loan
This USDA mortgage loan is for applicants whose income maxes out at 115% of the median income in your current area. To qualify, you must show that you do not have adequate housing and want to move to a location that falls within the USDA RD Home Loan region.If you are eligible, you can get 100% financing and all closing cost rolled into your loan or transferred to the seller. This means you can move into your new home without having to put any money down first.
- Direct loan
If your income doesn’t allow you to qualify for a guaranteed loan, this is another option. Direct loans are meant for borrowers with extremely low incomes; typically characterized as either low or very low-income borrowers.
- Very low income- If you make below 50% of the median income in the area where you live
- Low income- If your income falls between 50% to 80% of the area in which you live
- Moderate income- If you make between 80% to 100% of your area’s median income
You can use this loan to construct, repair, or relocate to a new home.
- Rural repair and rehabilitation loan
This option is strictly for making repairs and renovations. Generally, the purpose should be making the home safer and more habitable. This includes removing safety hazards or modernizing your property.
All USDA loans come with either a 15-year fixed rate mortgage or a 30-year fixed-rate mortgage. There are no adjustable rate mortgages (ARM).
Are USDA Loans Good?
What are the benefits of USDA mortgage loans to the borrower?
- The loans allow low and very low-income citizens to own homes at affordable rates in rural and suburban areas.
- It is easy to qualify for a USDA loan even if you have a poor credit history.
- You can get a mortgage loan with zero down payment. This is different than many conventional loans that require a minimum of 10% down.
USDA Home Loan Requirements, Eligibility, and Limits
Do you qualify for a USDA loan? Most likely the answer is yes.
As a matter fact, USDA loan requirements are among the most flexible in the whole country.
Check them out below:
Eligibility – for you to qualify for a USDA guaranteed home loan you should be a US citizen or permanent resident, have a relatively good credit history with no defaulted accounts in the last 12 months, and can show a history of dependable income. While there are no strict USDA income limits, your total monthly payments should not exceed 41% of your monthly income.
It is not just your income that matters; the house also must be located in a rural or suburban area.
Credit score – if your credit score is 640 or higher you will be able to receive streamlined processing. Many lenders can work with credit scores that are lower, but might ask for additional paperwork. If you don’t have a credit history at all, you might still qualify with other credit references, like your utility payment history.
Loan limit – your credit limit depends on your location. Many counties have a limit of $216,840, but you can get as much as $500,000 if your home is in a high-cost location.
Down payment – there is no down payment required for a USDA mortgage loan, and you can even get up to 100% financing.
Closing costs – closing costs usually vary from one lender to another, which is why it is a good idea to choose a trusted mortgage company that will go over all your options with you.
Mortgage insurance – the USDA home loan program requires borrowers to pay mortgage insurance premiums to keep the program running. The USDA lowered the premiums in 2016 so now borrowers only have to pay a 1% upfront fee when the application is processed and 0.35% per annum fee based on the remaining principal balance.
The insurance is added to your loan so you don’t have to worry about cash payments.
Repeat buying – USDA loans are not limited to first-time home buyers only. You can still apply through the program again, as long as the home will be your primary residence.
Where to Get a USDA Home Loan
So who does USDA loans? There are multiple USDA-approved lenders to choose from, each with their own terms and conditions. The trick is to pick one that wants to work with you, and not against you, in getting you the best mortgage possible. Here at TJC Mortgage we know it all starts with a home loan, and we’re happy to guide you through the process of getting your dream house.