USDA loans are available for certain properties with no down payment required and possibly a lower interest rate than conventional loans. However, eligibility for USDA loans largely depends on borrower income and home location.
While those four letters, namely USDA, may conjure up images of prime beef or grain crops, this particular usage refers to a program that can encourage homeownership for those with lower incomes in rural and some suburban areas. These mortgages may also help people buy and repair homes in need of updating.
Here, you’ll learn more about what these loans offer, how they work, and who qualifies for them.
What Is a USDA Loan?
USDA loans offer a loan option with no down payment for certain qualifying buyers who plan to purchase property in rural or some suburban areas. These mortgages are guaranteed by a division of the USDA known as the USDA Rural Development Guaranteed Housing Loan Program.
While partner lenders typically issue the loans themselves, the fact that the government is taking on some of the risk of lending funds has a big benefit. It allows these loans to often offer a considerably lower rate than you’d find at a commercial lender.
To qualify for a USDA loan, you may have to earn below a specific income limit and buy in certain areas. You may also purchase a property in need of repair.
If you are eligible, another perk of these mortgages is that private mortgage insurance (PMI) is not required, which is another way they present an affordable option for some buyers.
How USDA Loan Programs Work
USDA Rural Development’s housing programs give individuals and families the opportunity to buy or build a rural single-family home with no money down, repair their existing home, or refinance their mortgage under certain circumstances.
The USDA promotes homeownership for low-income households and economic development in rural areas.
USDA loans are available to eligible first-time homebuyers and repeat buyers for primary residences.
USDA Loan Requirements
Here are more details on who qualifies for a USDA loan.
Single Family Housing Guaranteed Loan Program
This program is the one that most people think of when they hear about USDA loans.
The USDA guarantees 30-year fixed-rate loans originated by approved lenders so that people in households with low to moderate incomes can buy homes in eligible rural areas. (You’ll need to search with an exact address.)
The income threshold is defined as no more than 115% of area median household income. In other words, your household income can’t exceed the area median income by more than 15%.
Buyers can finance 100% of a home purchase, get access to better-than-average mortgage rates, and pay a lower mortgage insurance rate.
That means no down payment, but borrowers still might want to look into down-payment assistance programs that also may help with closing costs.
A USDA loan can be used to purchase, renovate, or build a primary single-family home (no duplexes).
Single Family Housing Direct Home Loans
These subsidized loans, issued directly by the USDA, are available for homes in certain rural areas and for applicants with low and very low incomes.
The amount of the subsidy depends on the adjusted income of the family, and it reduces the family’s mortgage payment for a certain amount of time.
Adjusted income must be at or below what’s required for the geographical area where the house is located, and applicants must currently be without housing that’s considered safe, sanitary, and decent.
In addition, they must be unable to qualify for loans elsewhere; meet citizenship requirements (or eligible noncitizen ones); legally be allowed to take on a loan; and not be suspended from participating in federal programs.
The home itself must meet certain requirements for USDA loan eligibility. It must:
• Typically have no more than 2,000 square feet
• Not have an in-ground swimming pool
• Not have a market value that exceeds the loan limit for the area
• Not be used to earn income from the home.
Typically no down payment is required, although borrowers who have more assets than are allowed may need to use part of them toward the purchase. The rate is fixed and, when taking payment assistance into account, could be as low as 1%. The repayment term can be up to 33 years, or 38 years for applicants with very low income.
Funds can be used to purchase, build, repair, or renovate a single-family home. Once the title is out of the borrowers’ names or they no longer live in the house, they must repay part or all of the subsidies received.
Apply directly with your state Rural Development office .
This online eligibility tool can help potential borrowers see if they might qualify.
Single Family Housing Repair Loans and Grants
This program, also called the Section 504 Home Repair Program, is for homeowners with very low incomes who need a loan to improve, repair, or modernize their homes.
The program also offers grants if the applicants are 62 or older with very low incomes, and the money will be used to remove hazards to health and safety. The borrower must own the home and live in it. Prospective homeowners must not be able to find affordable credit through other venues.
Current limits on both the loans and the grants are as follows:
• Maximum loan amount: $40,000
• Maximum grant amount: $10,000
• Maximum per person: $50,000, if they qualify for both the loan and grant.
Loan terms can be up to 20 years, with a fixed 1% interest rate.
For details about how to apply, applicants may contact their state Rural Development office.
Homeowners of higher income levels who need to finance home repairs may want to look into home improvement loans.
Note: SoFi does not offer USDA loans at this time. However, SoFi does offer FHA, VA, and conventional loan options.
What Is the Minimum Credit Score for a USDA Loan?
The USDA does not set a firm credit score requirement. However, you are most likely to be approved if your score is in the 640 and higher range.
Even with a lower score, however, you may qualify for a loan.
Recommended: Learn the Cost of Living by State
Pros and Cons of USDA Loans
This section will focus on the USDA guaranteed loan program.
USDA Loans Pros
• Typically no down payment is required.
• Lower rates than FHA and conventional loans on average.
• There isn’t a minimum FICO® score to qualify, so a less-than-ideal credit history may not prevent the loan from going through, though lenders like to see a credit score of at least 640.
• Lenders may also require a debt-to-income ratio (DTI) of 41% or under. Depending on other factors, a slightly higher DTI might be possible.
• No private mortgage insurance (PMI).
USDA Loans Cons
• Homes must be in eligible rural areas.
• Applicants must meet income limits.
• Only certain lenders offer the program.
• USDA loans require a 1% upfront guarantee fee and a 0.35% annual guarantee fee, based on the remaining principal balance each year.
Other Types of Mortgage Loans
In general, if your household income is more than 115% of the area median income, you can’t qualify for a USDA loan. The income of the entire household is considered, even if someone isn’t going to be on the mortgage note. That’s just one reason you might need to seek another type of mortgage.
Three broad types are:
Conventional loans: These are provided by banks and other private lenders and are not government-backed loans. This is the most common type of mortgage today. Borrowers typically need to have a down payment of 3% to 20%, and the lender will look at the debt-to-income ratio and credit scores when deciding whether to grant the mortgage loan.
FHA loans: Lenders that issue these loans are insured by the Federal Housing Administration, and it can be easier to qualify for this type of loan than a conventional mortgage. Lending standards can be more flexible and, with a credit score of 580 or higher, the borrower might qualify for a down payment of 3.5%. Note that mortgage insurance for an FHA loan can be high.
VA loans: Veterans, active military members, and some surviving spouses may receive VA loans provided by banks and other lenders but guaranteed by the VA. Eligible borrowers can benefit from a loan with no down payment and no monthly mortgage insurance. Most borrowers will pay a one-time funding fee, though.
Different types of mortgage loans have benefits and disadvantages. As a homebuyer, it is beneficial to understand what is applicable to your situation.
First-Time Homebuyer Programs
Borrowers who qualify as first-time homebuyers can receive benefits. Loan programs include:
• Freddie Mac’s Home Possible® program and Fannie Mae’s 97% LTV. The programs offer down payments as low as 3% for buyers who have low to moderate incomes.
• The Fannie Mae HomeReady® mortgage program. Borrowers who undergo educational counseling can get help with closing costs.
• Mortgages for qualifying first-time buyers, who can put as little as 3% down.
It can make sense for low- and moderate-income borrowers to contact their state housing agency to see what programs are available for first-time homebuyers.
Recommended: Find First Time Home Buyer Programs in Your State
The Takeaway
USDA loans support rural homebuyers and homeowners who meet income limits and whose properties qualify. Others shopping for a mortgage will need to research home loans and find a choice that suits them.
FAQ
What are the basics of how a USDA loan works?
USDA loans are available with no down payment and potentially a lower interest rate to borrowers who are buying certain properties in qualifying rural areas and who meet income limits.
What’s the difference between an FHA loan and a USDA loan?
These loans address different types of properties and have different qualifying requirements. With a USDA loan, there is no down payment requirement, there is no PMI, but borrowers must meet income guidelines and be purchasing properties in a rural or suburban area. With an FHA loan, there is a 3.5% down payment and a DTI requirement, but there is not the regional guideline for the property. However, PMI is assessed.
Is FHA better than USDA?
When comparing FHA vs. USDA loans, it’s not really a matter of one being better than another but of which one suits your needs and which one you qualify for. An example: If you are buying in a rural area, you might get a USDA loan requiring no down payment. If you are buying in a metropolitan area, you might instead qualify for an FHA loan with 3.5% down.
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