Are you a low-income earner who lives in a rural area in the United States looking for a Home Loan? If yes, then ensure you read this complete guide to the end. The USDA Loan is a government program that was put in place to ensure low-income individuals living in rural areas have access to loans to buy their own homes.
Before we go deep into the USDA HOME LOAN, let us take a look at some important things you need to know about the USDA Home Loan, its Meaning, Types, and How to get one.
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What Is a USDA Home Loan?
This is an acronym for the U.S. Department of Agriculture (USDA). The loans being offered by the USDA is designed to offer home loans or mortgage to individuals who fall under the category of what is regarded as low-income earners residing in rural parts of the country. It is believed that these low-income earners cannot afford a conventional mortgage, so there needs to be provision for them.
If for any reason you find yourself living in a rural area in the United States and you’re finding it difficult to get a conventional loan, then you can consider going for the USDA guarantee loan or USDA direct loan.
In the United States, some individuals are living in rural areas that might be unsafe or unhealthy for both adults and children. To help these low-income individuals get access to a home loan that can help them get modern utilities, the government ensured that these loans being offered by the USDA are up and running to their full capacity.
As a low-income earner, you might have a different challenge from another low-income earner. All circumstances differ, this is why the program is offering qualified applicants one of two options: a federal guarantee of a mortgage through a commercial bank, or a direct loan from the government. Both are 0% down payment loans.
Now that you have a better idea of the USDA LOAN, let me make clear a few keys you need to put into consideration when it comes to the USDA Home Loan.
Also Read: Buying a House: How much money do you need to buy a house?
Important Key Things To Know About The USDA Loan
- The USDA Home Loan serves as a last resort for individuals living in a rural area who need a mortgage to get their own home.
- When you compare the USDA Loan to other mortgages, you’ll realize that the qualification standards for the USDA loan are linear compared to others out there. However, for you to enjoy the USDA loan, you need to ensure that you have a reliable or steady income that is high enough to repay the loan over 30+ years at a fixed interest rate.
- When it comes to offering loans to rural areas, the USDA made it clear that these direct loans are for only eligible individuals living in rural areas where they have less than 35,000 residents.
Having a Better Understanding Of USDA Home Loans
As I have mentioned before from the very beginning of this article, the USDA Loan is a mortgage loan that was designed and guaranteed by the United States Department of Agriculture’s Rural Housing Service agency to help individuals living in a rural area with a population of less than 35,000 to secure a mortgage loan to help them get their own homes in rural areas.
According to Investopedia, section 502 of the USDA Loan program made available in 1949 made it clear that the government of the U.S. will always ensure that they provide loans or low-cost financing for low-income earners for them to easily get their own homes. In the Section 502 loan program, there were two programs put in place which are the Section 502 Guaranteed Loan and the Section 502 Direct Loan.
With these two programs put in place in section 502 of the loan, individuals should enjoy 100 percent loan borrowing so long as they are eligible.
What Are The Two Types Of USDA Home Loans?
The two major USDA Home Loans are the USDA Guaranteed and Direct loan programs. These two programs are entirely different with the same aims. When you make a comparison. However, you will realize that both of them make provision for housing and mortgages in rural areas and offer no-down-payment financing.
Let me make a comparison so you can better understand the differences or similarities that these two loans have.
Guaranteed USDA Loan
Guaranteed USDA Loan If you’re going for the Guaranteed USDA Loan, it is vital that you understand how the loan works. With the Guaranteed USDA Loan, you will be getting 90% of the mortgage amount that you’re qualified for as an applicant who got a mortgage through a financial institution such as the bank or any other commercial lender out there. With this put in place, it makes it easier for you to conclude the overall approval process within a shorter period while getting a 30-year fixed-rate loan without you having to make any form of down payment. When you get this loan offer, you can use the loan to buy, construct, repair, renovate, or relocate a primary residence.
When you’re getting the USDA guaranteed loans, you’re expected to pay 1% of the amount you’re borrowing as a processing fee so you can finalize the entire process and the loan offer. What this means is that you will be paying this 1% to the lender and aside from that, an annual fee payment of 0.35% of the loan is loan amount is expected from you.
One of the downsides of this loan offer is the fact that individual lenders usually determine the interest rate of this loan offer. This is why I will advise you to take your time to compare and shop around until you find a better lender that you can work with.
Important Information on USDA guaranteed loans
Down payment: 0%.
Assets: None.
Debt-to-income ratio: 41%. With the USDA-guaranteed loan, when a borrower has some history of spending more than 41% of his or her income on debt payments while still meeting all the financial obligations, the borrower may still qualify.
Credit score: The USDA Guaranteed loan does not have a minimum credit score before you can qualify. All that is expected of you as a borrower is to demonstrate the willingness to repay the loan. If you are someone with a low credit score, you don’t have anything to worry about. Just make you provide evidence that shows that you are capable such as a payment record of your rent or other ositive source of nontraditional credit just in case you don’t have delinquent payments on your credit report.
Income: Low to moderate income, not to exceed 115% of the area’s median income. You must not qualify for any form of conventional financing without private mortgage insurance (PMI). You should also have a one-year history of traditional employment or a two-year history of self-employment or seasonal income.
Property location: Must be in a rural area.2
Property type: Primary residence, non-income-producing.The property you’re getting must not have an in-ground swimming pool.
Home size: Must be considered modest for the area.
Property size: Must be typical for the area
Direct USDA Loan
As the name implies, the Direct USDA Loan is coming from the USDA. This type of loan is designed for individuals who fall under the category of low-income earners. These people are believed to be individuals who can’t afford to get a mortgage from any other sources out there and live in very poor conditions without access to decent, safe, and sanitary housing.
If you’re looking for a longer loan tenure and you believe to fall under this category, then this is for you. You can repay your loan in a 33-38-year loan tenor.
When I was going through the recently updated interest rate from the official website https://www.rd.usda.gov/, I noticed that the interest rate has been increasing to 4.75% for loan income earners. These changes were put into effect on December 1, 2023
Important Information on Direct USDA Loan
Down payment: 0%.
Debt-to-income ratio: 41%
Credit score: Minimum of 640. It is expected of you as a borrower to demonstrate the willingness to repay the loan. If you are someone with a low credit score, you don’t have anything to worry about. Just make you provide evidence that shows that you are capable such as a payment record of your rent or other ositive source of nontraditional credit just in case you don’t have delinquent payments on your credit report.
Income limit: You need to have a modest income that does not exceed 115% of the area’s median income.
Property location: The location must be in a rural area, which is defined as an area with a population of 35,000 or less.
Property type: Primary residence, non-income-producing. The property cannot have an in-ground swimming pool.
Home size: 2,000 square feet or less.
Property size: Small enough that it can’t be subdivided into smaller parcels under local zoning laws.
How To Go About Getting a USDA Home Loan
Before you think about applying for this loan, know that the financing is coming from the U.S. government. You can apply directly through the USDA Rural Development if you’re going for a direct loan. However, in the case of the guaranteed loan, there are a list of approved lenders you can work with who offer such loans. See the list of approved lenders.
How much down payment is required?
No down payment is typically required. Applicants with assets higher than the asset limits may be required to use a portion of those assets.
Is there a deadline to apply?
Applications for this program are accepted through your local RD office year-round.
How long does an application take?
Processing times vary depending on funding availability and program demand in the area in which an applicant is interested in buying and the completeness of the application package.
Conclusion
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