Don’t Live in a Big City? Consider a USDA Loan
Embarking on the quest to purchase a new home can be both exciting and frustrating. The first major hurdle you must cross is getting someone to work with you on a mortgage loan. This is especially difficult if you have a low income or have dealt with credit issues in the past. In their search for a lender, many people overlook a place that could be perfect for their needs, the United States Department of Agriculture (USDA). This program has a Rural Development Guaranteed Housing Loan Program that helped 127,000 families in 2017 realize their dream of becoming a homeowner.
What Is a USDA Loan?
The USDA loan program was designed to improve the economy and quality of life in rural America. USDA loans are mortgages for rural homebuyers that provide zero-down payment mortgages for borrowers who don’t have a great deal of income and may not be eligible for a traditional loan. The repayment time for these loans is normally 33-38 years, which creates lower monthly payments. The interest on such loans is lower than the going rate and is fixed for the term of the loan. The interest rate can sometimes be as low as one percent.
These loans are normally given to individuals and families who don’t currently own a home, but they can also be given to people who currently own their own home but have a need to either relocate or refinance.
The program is divided into three separate types of loans.
Three Types of USDA Loans
This is a loan that guarantees the borrower a mortgage if they go through a participating lender and meet all the criteria. This allows the borrower to get the loan with little or no down payment. There is a need to pay a mandatory insurance premium, however. This is money that is paid to the lender. It consists of a portion of the amount borrowed to help ensure the lender is paid should the borrower stop making payments.
These loans come directly from the program and are reserved for applicants with very low incomes. Income thresholds vary by state. With help, the borrower can see interest rates as low as one percent.
Home Improvement Loans and Grants
This program is for those who already own a home but need to make repairs or would like to upgrade a home they currently own. The loans need to be repaid but the grants do not. In most cases, there is a package deal that includes both. On average, the total amount of these packages amounts to $27,500 in assistance.
Who Qualifies For A USDA Loan?
The guidelines for those who qualify for a USDA loan are based on income and debt ratio. An inaccurate assumption of many is that the borrower must be working in some form of agricultural field, but the occupation of those seeking a mortgage has nothing to do with being accepted. Credit scores of at least 640 are preferred but this isn’t always necessary. The following criteria are the basics:
- Must be a U.S. citizen or permanent resident
- The monthly payment has to be lower than 29 percent of the monthly income of all adult members of the household. This includes the principal, interest, insurance, and taxes.
- Other debts, such as utilities, transportation, etc. can’t be greater than 41 percent of the monthly income. For those with a credit score over 680, however, the USDA may work with the borrower a little more when it comes to the percentage of income to debt ratio.
- Must have had a dependable income for at least the past two years.
- There can’t have been any accounts turned over to a collection agency within the past year. This may be waived if the cause was beyond the control of the borrower and was only temporary.
- The applicant can’t ever have been banned or suspended from participating in a federal program.
This is a need-based mortgage program and priority is given to those deemed to have the greatest needs. These are people who:
- Are without “decent, safe, and sanitary housing”
- Are unable to get a home loan from traditional sources
- Have an adjusted income that is below the low-income limit for the area they seek to live in
What Is Considered Rural?
When people hear the word “rural”, they often think of fields full of crops, a barn full of animals, and neighbors a mile or more away. While this is one scenario, the USDA has a broader definition that allows people to get mortgages for many small towns or areas in the suburbs outside of major metropolitan areas. There are three types of areas that can qualify as rural.
The population of the area doesn’t exceed 10,000 residents.
The population doesn’t exceed 20,000 and is not located in an area listed as a metropolitan statistical area. There also has to be a lack of availability for those with low income to obtain a mortgage.
An area that was once considered rural but lost that status after the 1990 census may qualify if it still maintains rural characteristics and the population is under 35,000 and there is a serious inability of those with low and moderate income to get mortgages.
What Are the Property Requirements?
In addition to the property being within what is considered a rural area, the home must also be the primary residence of the family. It can’t be a duplex or used as a money-making farm, vacation home, or income property. The property can contain land for personal gardening and barns and silos that are no longer used for income-generating. These limits leave a lot of choices available for those seeking a home. They can be either already standing or new construction. Manufactured homes, condos, and townhouses are also eligible. Short sales and foreclosed homes are also possibilities.
A word about the home being the family’s primary residence is needed. Should the buyer ever decide to sell the home or move, the balance of any help received will have to be paid back immediately.
The structure itself is subject to inspection and must meet certain requirements to be approved.
- The property must be easily accessible from a paved or all-weather road.
- The foundation must be structurally sound.
- The roof must be in good shape with no leaks or chance of failing to protect the residents.
- The heating and cooling systems must be functioning.
- Electricity must be adequate for the needs of an average family the size of the buyer’s and it must be updated and have no frayed or exposed wiring.
- There must be suitable plumbing and water flow.
- Normally, the size may not exceed 2,000 square feet.
- There can be no in-ground pool.
The USDA Website
The USDA website is a great place to start when trying to determine such things as whether a person meets income requirements or a home’s location is within what is considered a rural area. They offer an interactive map that can give information on either an area or a particular address.
How to Apply
When reaching out to an approved lender, the borrower will need certain documentation to get the process started. This will help make the process more streamlined and quicker. Before reaching out to a lender, gather the following documents:
- Copies of identification for all family members.
- Social security cards for family members.
- Pay stubs and tax records.
- Bank and retirement statements
- Information on any debts
- Credit report
- Any current mortgage statements and property tax bills
- References from a current landlord and utility bills if your credit history has been spotty in the past.
Now it is time to briefly look at the process you can expect to go through once you apply.
The USDA Loan Process
Knowing what to expect will allow a first-time buyer to feel more confident about the process.
- Get pre-approved. This allows the lender the chance to tell you how much they feel they can loan you. This amount will vary from one area to the next. In some rural areas, the amount may be $100,000. In areas where the cost of living is higher, the amount may be as high as $500,000. Knowing the amount in advance helps when starting your actual search for a home.
- Find the house. This can often be the longest part of the process. You will need to know what area you are looking to live in, how much you can afford, and if the home meets the needs of you and your family. This is a decision that needs careful consideration as this will be your primary residence for at least the next thirty years.
- Get an inspection. This is normally done by a third party and is meant to make sure the property meets all the requirements set down by the USDA.
- Sign off on the mortgage. This allows the bank to send the paperwork to the USDA.
- The USDA then finalizes their end of the deal.
- Close the deal and move into your new home.
Wrap Up: Pros and Cons of USDA Loans
In every situation, there are both pros and cons. What is necessary is to determine whether the pros are greater than the cons, not just in number but also in quality. We have covered the USDA loan in detail and, for many people, it presents an opportunity to turn the dream of owning their own home into a reality. Here is a brief review of both the pros and cons.
Pros of a USDA Loan
- Little or no down payment
- No need for collateral
- Less-than-perfect credit need not be a hindrance.
- Interest rates are fixed and low.
- There is no pre-payment penalty.
- It is possible to use the money for repairs
- Closing costs can be incorporated into the loan
- The loan can cover building a home, not just buying one already existing.
Cons of a USDA Loan
- There are geographic restrictions.
- The borrower needs to pay for mortgage insurance.
- There are income limits.
- Only single-family homes are eligible.
- A fixer-upper may not meet qualified standards.
- Moving or selling comes with restrictions while still repaying the loan.
We Can Help You Qualify for a USDA Loan
We can help you determine if a mortgage through the USDA is the correct path for your mortgage or if there is another path that may better suit your needs. Wherever you are in your home-buying journey, from the thought that you may want to take this step to the point of knowing exactly what home you are seeking to buy, we can help. Reach out and speak with one of our representatives and see what we can do to answer your questions and make your journey easier.
Remember to ask about the many loan types which will ultimately decide the borrower’s loan requirements with regard to income, credit scores, and assets (down payment & reserves, etc.).
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