The USDA home loan program is a special type of loan that is backed by the U.S. Department of Agriculture, intended for those who want to purchase a property in a rural or suburban area. These loans can be used for renovation, to buy a home, or to build a home in the appropriate locations. There are multiple loan products provided under the USDA home loan program, but they share low-interest rates and the ability to purchase a home with no down payment.
Types of Loan Under the USDA Loan Program
There are multiple types of loan available under this program: the single-family direct home ownership loan, the single-family guaranteed home ownership loan, the rural repair and rehabilitation loan, and the mutual self-help loan:
- Single-family direct homeownership loans. These loans can be up to 38 years long, which significantly reduces the amount of the monthly payments required. To qualify for this loan, a household must generally fall under 80 percent of the median income for the area. This loan can only be used to purchase a home that is considered to be under market value.
- Single-family guaranteed housing USDA loan. For those who have income that does not exceed 115 percent of the median income in the area, a 30-year loan for a modest home may be available.
- Rural repair and rehabilitation loans. For those who are currently in homes that are desperately in need of repair — and are economically disadvantaged — this loan can let them borrow the money that they need. Up to a $20,000 loan and a $7,500 grant is available to repair an existing property.
- Mutual self-help USDA loans. With a self-help loan, a family can get a 38-year loan to build a home that is safe and inhabitable themselves. Families must have an income at 80 percent or below the area’s median income.
Though these loan products are used for different things, their effective USDA home loan requirements are generally similar. USDA home loan lenders can give more information about which loan product is best for an individual and the property that they’re interested in.
USDA Loan Requirements
With a minimum credit score required of 620, the USDA home loan has flexible loan requirements intended for lower income to moderate-income buyers. Those who have a bankruptcy or foreclosure in their past can still get a USDA home or USDA rural development loan, as long as around three years have passed since. When the USDA home loan requirements are met, this type of loan can be used for existing homes, building homes, and purchasing foreclosures.
The USDA loan program is intended for urban and suburban homes in rural areas. Metropolitan homes are not likely to meet USDA home loan eligibility standards. Further, household income will need to meet certain guidelines — and homeowners will need to agree to occupy the dwelling as a primary residence. Only U.S. citizens are allowed to apply for a USDA loan.
Income Eligibility USDA Loan Requirements
Income limits are adjusted based on where an individual lives and how many individuals are being considered for the loan. In most locations, a household that makes less than $78,200 a year will qualify for a USDA loan. However, they may not be able to acquire a direct loan, just a guaranteed loan, if they are close to this cap.
Individuals who make less than this may qualify as low income or very low-income applicants. Regardless of how much money is made, the applicant must be able to show on their USDA loan application that they have enough money to pay for their housing costs.
USDA Home Loan Eligibility
A USDA loan application must be completed for a specific property that meets the criteria of the loan program. USDA home loan eligibility requires that the home is used as a primary residence, the site has direct access to a street, road, or driveway, and that the property has adequate utilities and access to wastewater disposal. In addition to this, the property must be in an area that is considered to be rural.
Home buyers may be surprised to find out that there are more rural locations than they think; many areas of the suburbs still qualify as a rural area as they are not next to a major metropolitan center. Rural areas are defined as being in “open country,” in addition to being in areas that have a population less than 35,000. A USDA lender will need to be consulted directly regarding whether a specific property meets the appropriate criteria for the USDA loan program.
The Benefits of a USDA Loan
A USDA home loan or USDA rural development loan requires no down payment and has relatively flexible lending standards. Though there are USDA home loan guidelines that have to be followed, it’s generally one of the more affordable ways for low to medium income households to purchase a home outside of a metropolitan area.
In terms of interest rate, the USDA home loan program is extremely competitive, with loans that can be as low as 1% interest. Further, USDA home loan lenders are able to underwrite loans that are up to 38 years in length, which is significantly longer than a conventional loan. In a conventional loan, this would lead to paying much more in interest. When paired with the low-interest rates offered by USDA approved lenders, it makes purchasing a home very affordable.
Getting a USDA Home Loan
Those who are interested in the USDA home loan program will want to fill out a USDA home loan application. There are numerous USDA approved lenders who can take a USDA home loan application, but not all mortgage companies underwrite this type of loan.
Once a loan application has been filled out and the USDA home loan guidelines have been met, the purchase process is the same as any other type of mortgage loan. It may take up to 60 days to acquire this type of loan, though the average waiting period is between 20 to 25 days.
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