What is a USDA Loan?
When you're looking for a simple life, and you’re also looking for a mortgage with a low down payment, it’s time to check out what the US Department of Agriculture has to offer. We have all the details below, but if you’d prefer a more personal introduction, contact our experts at Home.Loans and we’ll walk you through it point by point.
USDA Loan Basics
Mortgages and home repair loans available through the USDA are a special kind of beast that's tightly limited in scope. In general, they’re limited to people in rural areas, with populations of less than about 35,000, and who have low to modest incomes. USDA loans can be used to buy first homes, to make a second-time purchase or, in the case of home repair loans, to fix up an already-owned property.
Like with FHA's mortgage program, the USDA has a wide range of offerings to fulfill a number of different needs. Some of the department’s loans are serviced by banks, while others are self-serviced (these can also come with subsidized interest rates). Because the USDA is very particular in how its loans are handled, it can be difficult to find a lender who will make a USDA home loan, but they’re out there.
Pros and Cons of USDA Loans
USDA mortgages and loans have some commonalities that set them apart from other mortgages. Let's look at the benefits and drawbacks of the USDA mortgage program.
Benefits of the USDA Loan
- Low downpayment options. USDA loans are either guaranteed or made directly by the USDA. Because of its high level of involvement, buyers are often able to come to closing with zero money down and leave with their own home.
- Easy, flexible repayment terms. Both USDA mortgage loan programs make it easy to make payments, but the Direct Loan program goes a step further. Loan terms are partially calculated on how you’re able to repay the loan itself, with terms ranging from 33 to 38 years, based on your income.
- Lower mortgage insurance. USDA loans typically have lower mortgage insurance than conventional or FHA loans.
- Less stringent credit terms. There is no minimum credit score requirement for USDA loans, but if you have a 680 or higher, your application might move a bit faster-- and you might get to take out a slightly larger loan.
- Financing even low-income buyers. It can be difficult for a low-income buyer to buy a house due to mortgage minimums imposed by some programs and banks. USDA fills that gap by getting you the financing you need with smaller loans designed for rural areas that often have lower property values.
Drawbacks of the USDA Loan
- Limited to rural areas as defined by the USDA. If you’re a city-dweller or looking to move closer in, you’ll have to find a different loan. USDA limits its loans primarily to areas with populations of 35,000 or less. You may feel like you live out in the sticks, but unless it’s on the USDA income map, you’ll have to look elsewhere.
- Income-eligibility required. Although it’s great for lower-income buyers, buyers with higher incomes are out of luck -- even if they have no assets or a lot of debt. This can be frustrating if you’re right on the edge of qualification or have a lot of debt.
- Monthly payments are limited by income. In most cases, a borrower's PITI ratio (principal, interest, taxes, insurance) cannot exceed 29% of their monthly income. And, their TD ratio (total debt-- including car payments, student loans, etc.) cannot usually exceed 41% of their monthly income.
- Your property must meet eligibility criteria. FHA requires a basic property inspection, but that’s nothing compared to what happens during a USDA inspection. It’s great for the future owner, if the house can pass muster. In some areas, the only homes that will be approved for USDA loans are homes built specifically for the program due to its thoroughness.
Types of USDA Loans
There are a few different home loan options under the USDA loan program. While all of the USDA mortgage solutions share the low-interest and zero-down-payment requirement, they do have different terms and purposes. Below are summaries of each USDA loan product.
Single Family Direct HOME OWNERSHIP USDA Loan
The Single Family Housing Direct Home Loans program, also known as the Section 502 Direct Loan Program, is a USDA loan program designed to help low-income families in rural areas buy, renovate, or repair adequate housing. Unlike some other USDA programs, it provides payment assistance, a subsidy that helps reduce the borrower's mortgage payments for a certain period of time. Eligibility is restricted to families whose household income falls below 80% of the AMI, are planning to use the home as their primary residence, and are otherwise unable to find "decent, safe, and sanitary housing."
Single Family Guaranteed Housing USDA Loan
This is a USDA loan for moderate-income households that make no more than 115% of the AMI. In addition, borrowers must agree to use the home as their primary residence, and be a U.S. citizen, U.S. non-citizen national or Qualified Alien. In general, the UDSA's Single Family Housing Guaranteed Loan program is meant to be used for modest housing in rural areas. Plus, it can also be used to refinance eligible loans.
Rural Repair and Rehabilitation USDA Loans and Grants
The USDA's Section 504 Home Repair program, also known as the Single Family Housing Repair Loans & Grants program, is designed to help low income homeowners repair their homes-- allowing them to remove health hazards and increase safety. To qualify for the program, a household needs to make less than 50% of the AMI and not be able to access to affordable credit from other sources. In addition, grants are available to homeowners 62 years and older who cannot pay back a home repair loan. The maximum loan available is $20,000, and the maximum grant available is $7,500, though these can be combined to create a total of $27,500 in loans and grants. For loans, the interest is capped at a cool 1%, making this a fantastic program for homeowners in need.
Mutual Self-Help USDA Loans
The USDA Mutual Self-Help loan is for low-income households that can't buy or build adequate housing. The program allows qualified organizations to monitor and help homeowners in the construction of safe, clean housing. Since 1965, the USDA's Mutual Self-Help Program has helped non-profit organizations build 50,000 homes in low-income areas.
Who’s the Ideal Borrower for a USDA Loan?
Because of the limited scope of USDA loans, it’s not hard to imagine the buyer who would use this kind of program. These are buyers who:
Live in a rural area.
Have little free cash to use for a downpayment.
Are interested in building home equity for their future.
Make an average or below-average income for their area.
Rural development loans have been an important part of life in the country for a long time, enabling farmers to buy farms and their children to buy houses in villages and small towns nearby. For families that want to remain close, even if not everyone wants to stay on the family farm, they’re a solid option that ensures that a first home is affordable.
The USDA Loan: In Review
USDA mortgages solve several different problems within the mortgage sphere. They address both rural properties, which are often difficult to finance because banks simply don’t want the headache of having to travel so far from a city center, and the low-value properties found in those areas, which many banks won’t even touch these days. In addition, buyers who may have non-traditional income, like farm income, for example, will find it easier to deal with the USDA. It opens up a lot of doors, provided you’re willing to hang your hat in rural America.
Are you looking for a little house on the prairie? We can help you navigate the paper trail that leads to the US Department of Agriculture’s door. Just contact us here at home.loans and we’ll get started.