What are USDA Loans and Am I Eligible for a Loan?

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USDA loans offer low rates and no down payment for rural home buyers. Find out more about these government loans and how to get them. (iStock)

If you are considering buying a rural home, you may be eligible for a USDA loan, depending on your income and other factors. USDA loans do not require a down payment and are often available even if your credit is low.

Understanding all the features of USDA loans will help you determine the benefits and risks and whether this type of loan is right for you. Here’s what you need to know about USDA loans, including who is eligible for the loan.

What are USDA Loans?

USDA loans are mortgage loans guaranteed by the USDA. These loans do not require any down payment and have low interest rates. USDA Housing Loans are designed to help low- and middle-income families buy housing in rural areas of the country.

The Ministry of Agriculture defines rural areas as a region with a population of less than 35,000. Home Improvement Loans are available to help buy, renovate, and upgrade existing rural homes, including eliminating any health and safety risks.

In 2019, the USDA issued over 99,000 USDA loan guarantees to families in the United States, Guam, Puerto Rico, and the Virgin Islands.

USDA loans versus regular loans

USDA Loans and Ordinary Loans are types of mortgages available to finance the purchase of a home. The main difference between these loans is that the federal government does not support conventional loans. Like VA loans and FHA loans, USDA loans are backed by the federal government, which gives borrowers access to additional benefits.

Conventional loans usually require a 20% down payment, while USDA loans do not require any down payment. Interest rates on USDA loans are often comparable to or lower than for conventional loans.

Borrowers who do not meet the down payment requirements for a regular loan may need to purchase private mortgage insurance or PMI. USDA loans do not require you to buy mortgage insurance, although some types of USDA loans come with an annual guarantee.

If you are looking for a mortgage loan, Credible will allow you compare mortgage rates In one place.

USDA loans vs FHA loans

USDA loans and FHA loans are government-backed loans. The USDA supports USDA loans, while the FHA guarantees FHA loans.

These loans differ in several key parameters:

  • Down payment requirements – USDA loans do not require a down payment. But FHA loans require a down payment of 3.5% (if your credit rating is 580 or higher) or 10% (if your credit rating is between 500 and 579).
  • Credit score requirements – The minimum required credit scores also differ depending on USDA loans – you will most likely need a 640 minimum credit score to be eligible for automatic approval, although you can still qualify for manual underwriting with a lower score. For an FHA loan, your score can be as low as 500, assuming you have a 10% down payment.
  • Mortgage insurance – FHA loans also include expensive mortgage insurance down payments, typically 1.75% of the loan amount. You will also pay an additional annual mortgage insurance premium in monthly installments, typically 0.45% to 1.05% of the loan amount, over the life of the loan. In some cases, you can also pay the insurance premium on USDA loans if you do not pay the down payment.
  • Borrowing limits – There are no set credit limits for USDA loans – USDA sets a maximum amount for each borrower depending on the eligibility for the loan. In 2021, FHA lending limits vary by county and range from $ 356,362 (low cost counties) to $ 822,375 (high cost counties).

How do USDA loan programs work?

People looking to buy or renovate a single family home in small towns can choose from three USDA loan types. Each loan works differently, but they are all designed to make home ownership possible for those who are not eligible for traditional mortgages. USDA loans can also help boost the economy and improve the quality of life in rural America.

USDA directly provides or guarantees USDA loans. Eligibility for these loans is income dependent and varies according to the average median household income for each specified area. The loan repayment period ranges from 20 to 38 years, depending on the type of loan. Only properties that meet USDA requirements are eligible for loans, which are usually limited to small single family homes.

Another marker of USDA loans is low interest rates, which means that borrowers most likely will not pay the same amount of interest over the life of the loan.

USDA loans are not required advance paymentthat can allow you to buy a home without saving thousands of dollars in advance. But that doesn’t mean there is no additional cost with the USDA loan. Borrowers with USDA-guaranteed loans must pay a loan guarantee fee of 1% of the loan amount. Guaranteed loans are also accompanied by an annual commission of 0.35% of the loan balance. USDA Direct loans do not require mortgage insurance.

What are the benefits of USDA loans?

Here are some of the benefits to consider when deciding if a USDA loan is right for you.

  • No down payment – USDA loans do not require a down payment.
  • Low fixed interest rate – USDA loans come with low fixed interest rates that are competitive or lower than other types of mortgage loans.
  • Flexible requirements – USDA underwriting guidelines are more flexible than traditional lenders and do not require a specific credit rating.
  • Closing costs – You can include the loan guarantee fee on your loan instead of paying it in advance.
  • No prepayment penalty – If you repay your USDA loan before the due date, there will be no prepayment penalty.
  • Financial repairs – You can take out a USDA loan to fund the renovation of your existing home to bring it up to current safety standards.
  • Purchase or refinancing – You can use a USDA loan to buy a home or refinance an existing mortgage loan.

What are the requirements for USDA loans?

While the requirements differ depending on the location and type of loan, here are some of the general requirements that you will need to meet if you want to qualify for a USDA loan.

  • Main residence – The house you buy with a USDA loan must be your primary residence.
  • Credit rating – There is no specific credit rating requirement for obtaining a USDA loan. Your credit and payment history is used to determine your ability to repay the loan. Borrowers with a credit rating above 640 will find it easier to qualify if they meet other loan requirements.
  • Income limits – For USDA loan guarantees, your income must not exceed 115% of the average household income. You must provide documentation of at least one year of income and two years of income if you are self-employed.
  • Duty – Your debt to income ratio, including a new mortgage payment, must be less than 41% of your gross monthly income, although you can still qualify if this is not the case.
  • Location – Where you plan to buy a home plays a huge role in obtaining a USDA loan. You can check if your region is eligible for the program USDA website
  • Citizenship status – You must be a US citizen, a non-US citizen of the US, or a qualified alien to be eligible for a USDA loan.

USDA loans can also be regulated by state and local laws, so research your area before applying for a loan.

Trustworthy lets you compare mortgage rates to find out what types of loans you can apply for.

How do I apply for a USDA loan?

You can apply for a USDA loan through the Department of Agriculture website or find an approved lender in your area (for loan guarantees). You may be asked to provide personal and financial information, including your:

  • Full name
  • Physical adress
  • Phone number
  • Birthday
  • Social Security number
  • Annual income
  • Employment history
  • Resources
  • Property information

Lenders use information such as your credit rating, payment history, credit usage and age of credit accounts when they are considering you for a loan. The processing time for a loan application depends on the availability of funding and the lender.

USDA loan types

The Department of Agriculture provides three types of home loans, each with its own requirements.

USDA Direct Loan

Direct home loans for single-family housing are issued directly by the Ministry of Agriculture. Low-income borrowers in rural areas can use direct loans to buy, build, renovate, renovate, or relocate a home to specific rural areas.

USDA Guaranteed Loan

Under the Guaranteed Single Family Housing Loan Program, USDA loans are available through approved private lenders with USDA support. Interest rates vary depending on the lender.

USDA Home Improvement Loans and Grants

Single-family home renovation loans are designed to help extremely low-income families renovate and renovate existing homes in specific rural areas. Grants are also available to low-income seniors who need to renovate their homes to address any security or health risks.

Is a USDA Loan Right For You?

If you live or plan to live in a rural area and have a low to moderate income, a USDA loan can be a great way to buy a home. A USDA loan is especially useful if you are not eligible for a mortgage loan using traditional methods and do not have a 20% down payment.

If you are not eligible for a USDA loan, you may still be eligible for another types of mortgages… It is important to research your mortgage options and look for the best mortgage loan for your situation.

You can compare mortgage rates and credible lenders.

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