In 2017, as a part of its Rural Development program, the USDA helped some 127,000 families buy and upgrade their homes. The program is designed to “improve the economy and quality of life in rural America.”
It offers low-interest rates and no down payments, and it may surprise you to find just how accessible it is. Buying a home is one of the single largest investments in a person’s life–and also one of the most exciting.
A home is more than a financial investment, but a step toward the American Dream, and the USDA loan program opens the door to homeownership for many who otherwise may not qualify for home financing.
If you feel more at home surrounded by pastures than pavement. If so, buying a home might be well within reach, thanks to the U.S. Department of Agriculture mortgage program.
In fact, the USDA might have one of the government’s least-known mortgage help programs.
A USDA home loan is a zero down payment mortgage for eligible rural homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.
If you already have a USDA loan, you can refinance it into a new USDA loan; however, you can’t refinance with a USDA loan if you currently have a different loan type.
How does USDA Issued Home Loans Work?
Going one step further in helping prospective homebuyers, the USDA issues mortgages to applicants deemed to have the greatest need. That means an individual or family that:
- Is without ‘decent, safe, and sanitary housing’.
- Cannot secure a home loan from traditional sources.
- Has an adjusted income at or below the low-income limit for the area where they live.
They’re backed by the U.S. Department of Agriculture, making them more accessible than other loan options. You can get a USDA loan as a 30-year fixed-rate mortgage.
The USDA usually issues direct loans for homes of 2,000 square feet or less, with a market value below the area loan limit.
Again, that’s a moving target depending on where you live. Home loans can be as high as $500,000 or more in pricey real estate markets like California and Hawaii, and as low as just over $100,000 in parts of rural America.
USDA Home Loan Programs
There are three USDA home loan programs:
- Loan guarantees: The USDA guarantees a mortgage issued by a taking part in local lender similar to an FHA loan and VA-backed loans allowing you to get low mortgage interest rates, even without a down payment. If you put little or no money down, pay a mortgage insurance premium, though.
- Direct loans: Issued by the USDA, these mortgages are for low- and very low-income applicants. Income thresholds vary by region. With subsidies, interest rates can be as low as 1%.
- Home improvement loans and grants: These loans or outright financial awards permit homeowners to repair or upgrade their homes. Packages can also combine a loan and a grant, providing up to $27,500 in help.
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How do I get a USDA Loan?
The process to get a USDA loan is like any other loan program out there, but comes with a few exceptions because of the government’s guarantee. The general application process looks like this:
- Pre-qualify with a USDA-approved lender.
- Apply for pre-approval
- Find a USDA-approved home
- Sign a purchase agreement
- Go through processing and underwriting
- Close on your loan
To help potential homebuyers prepare for the USDA loan process, the major steps to getting a USDA loan are outlined below.
#1. Find a Lender and Pre-qualify For a USDA Loan
The first step to getting a USDA loan is finding a USDA-approved lender. Hundreds of lenders make USDA loans, but some might only make a few of them every year. Working with a lender that specializes in this rural home program can make a big difference for homebuyers.
Once you’ve chosen a lender, it’s time to get pre-qualified. Pre-qualifying for a USDA loan is a relatively simple task that provides a general estimate of what you can afford, and if you are even eligible for the program.
This vital step can save you significant time and effort by narrowing down what homes you may purchase.
During this step, your lender will discuss how much you can afford and alert you to any red flags that may hold you back from qualifying for a USDA loan.
Be prepared to answer some initial questions about your financial situation. Most lenders will focus on:
- How much you wish to borrow
- Your gross monthly income and other assets
- Your total monthly debts
Many lenders will also ask your permission to do a hard credit inquiry. Pre-qualifying for a USDA loan will help to identify common income, debt or credit issues that could make closing on a USDA loan difficult.
For example, the USDA considers four different income calculations when determining a borrower’s USDA income eligibility. Pre-qualification is an opportunity to review your qualifying income sources.
Depending on the lender, you may get USDA pre-qualification and preapproval online.
#2. USDA Loan Pre-approval
Preapproval is a more thorough process than prequalification, considering your actual financial situation instead of mere estimates.
During this step, your lender will verify information about your income and finances. Some of the common documents that lenders require during preapproval include:
- W-2’s and tax returns
- Pay stubs
- Photo ID
- bank statements
- Social security awards letter
During this stage, your lender will determine how much you can actually borrow by verifying income information and determining your debt-to-income (DTI) ratio, which shows how much of your monthly income is going towards expenses.
Lenders often look at two types of DTI ratios: a front-end ratio that considers only the new housing expense in relation to gross monthly income, and a back-end ratio that looks at all major monthly expenses in relation to gross monthly income.
For USDA loans, lenders often look at 39% for a front-end ratio and 41% for the back-end. But guidelines and caps on DTI ratios can vary by lender and other factors, meaning it’s possible to have a DTI above these benchmarks and still qualify for a USDA loan.
Getting pre-approved is a critical step in the home-buying process. Home sellers and real estate agents want to see offers coming in from pre-approved buyers. Having a preapproval letter in hand shows home sellers you’re a strong and serious contender.
However, understand that preapproval does not mean we guarantee you a USDA home loan.
There are often supplemental conditions that must be met for final approval, including a satisfactory appraisal and further income and employment verification if necessary.
#3. Find a USDA-Approved Home
If you haven’t already, find a knowledgeable real estate agent and start your home search. Finding a real estate agent with USDA loan experience can help you navigate the housing market to find homes that are eligible for USDA funding.
The USDA requires that all properties be located in a qualified “rural” area. In addition, the property must serve as your primary residence and meets all other property condition and use requirements set forth by the USDA and lender.
Armed with your preapproval letter, and the knowledge of what areas are eligible for a USDA loan, you and your agent will have no trouble securing your dream home.
#4. Sign a Purchase Agreement
After you find the perfect home, you will work with your lender and agent to make an offer. This is the time to negotiate with the seller about covering some or all of your closing costs.
Once you and the seller sign a purchase agreement, your lender will order a USDA loan appraisal.
Appraisals differ from a home inspection and are required by the USDA as a safeguard to the homebuyer.
The appraiser will ensure the home is move-in ready and that the property meets USDA standards. If it doesn’t meet standards, it must be fixed before closing.
#5. Processing & Underwriting
Once you are under contract, an underwriter will review your information and examine the file to make sure your application and documentation are accurate and truthful.
The underwriting process for USDA loans can take longer than traditional mortgages because the program uses a two-party approval system. First, your lender will underwrite the loan file to ensure it meets all USDA requirements.
Then the USDA will underwrite the file, which is done automatically or manually. The USDA requires a credit score of at least 640 to qualify for their automated system known as GUS.
Once underwriters are satisfied, you’ll move toward your last step: the loan closing.
Once the lender and the USDA sign off on your loan file, you’ll receive a Clear to Close, which means you can head to closing day.
At closing, you’ll sign all the paperwork, finalize your USDA loan and take ownership of your new home.
What are the USDA Property Requirements?
- The home must be your primary home and not a vacation home or income property.
- The property can’t be a working farm
- Your home appraisal must show the condition of the home and also, meet the standards
- Water, electricity, heating and cooling systems must be up-to-date and functional.
- The foundation and house need to be structurally sound
- The property must be accessible from a paved or all-weather road
Hoe Long does USDA Loan Take?
While the process to secure a USDA loan is a lot like other loan programs, the actual timeline can vary based on your financial situation, credit score and selected property.
The initial USDA appraisal can take up to a week to complete. If repairs are necessary, then a secondary appraisal may also be required, which can delay your loan from progressing.
Further, if you do not qualify for GUS, the USDA will have to manually underwrite the loan application, which could require additional time to gather needed verification.
Borrowers can typically expect the USDA loan process to take anywhere from 30 to 60 days, depending on the qualifying conditions.
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Who is the USDA Loans Ideal For?
USDA loans help make owning a home more affordable for those living in eligible rural and suburban areas and with household incomes within the USDA limits. Read more about other benefits below.
Income limits to qualify for a home loan guarantee vary by location and depend on household size. USDA guaranteed home loans can fund only owner-occupied primary residences. Other eligibility requirements include:
- U.S. citizenship (or permanent residency)
- A monthly payment — including principal, interest, insurance and taxes — that’s 29% or less of your monthly income. Other monthly debt payments you make cannot exceed 41% of your income. However, the USDA will consider higher debt ratios if you have a credit score above 680.
- Dependable income, typically for a minimum of 24 months
- An acceptable credit history, with no accounts converted to collections within the last 12 months, among other criteria. If you can prove that circumstances that were temporary or outside of your control, affected your credit including a medical emergency, you may still qualify.
Applicants with credit scores of 640 or higher receive streamlined processing. Those with scores below that must meet more stringent underwriting standards.
And those without a credit score, or limited credit history, can qualify with “nontraditional” credit references, such as rental and utility payment histories.
What are the Benefits of the USDA Loan?
- You can qualify with a credit score as low as 640.
- USDA loans require no down payment, unlike FHA and conventional loans.
- The USDA monthly guarantee fee is lower than FHA monthly mortgage insurance in most cases, and You may roll these fees into your loan.
- You may roll your closing costs into your loan.
- If you already have a USDA loan, you can refinance it into a new USDA loan.
To apply for a USDA-backed loan, talk to a taking part lender. If you’re interested in a USDA direct mortgage or home improvement loan or grant, contact your state’s USDA office.
A program sponsored by the USDA might seem to be targeted to farmers and ranchers, but your occupation has nothing to do with the qualification process. Eligibility is simply a matter of income and location.
And no, you don’t need to know sorghum from a soybean. The USDA Income and Property Eligibility Site is used to evaluate the likelihood that a potential applicant would be eligible for program help.
In order to be eligible for many USDA loans, household income must meet certain guidelines. Also, the home to be purchased must be located in an eligible rural area as defined by USDA.