USDA Loans
May 2, 2022
The United States Department of Agriculture (USDA) implemented the USDA Loan to provide affordable homeownership and to fuel economic growth in rural and suburban areas. The program guarantees a 90 percent loan note to qualified lenders to reduce the risk of the loan for lenders. The Department assists eligible homebuyers by giving them the opportunity to purchase in an eligible rural area through a USDA Loan with a private lender. This is a great option, especially for first-time homebuyers, as it helps those who may not be able to afford the down payment required with a conventional mortgage.
USDA Loan Requirements
Due to the desirability of USDA Loans, certain guidelines must be met to qualify. Below is a list of basic requirements:
- Income requirement – income limits vary depending on the area, but the household income limit is typically $91,900 for a household of up to 4 individuals and $121,300 for 5-8 individuals. The general rule is that your household income cannot be 15% above the median income where you live. The borrower must also have an acceptable debt-to-income ratio
- Credit score and history – most lenders require a credit score of 640 and a clean credit history
- Geographic & property requirements – it must be a single-family home in an eligible area and must be used as your primary residence
- Employment – must have steady income and employment history of two consecutive years in most cases; self-employment is eligible
- Loan type – 30-year fixed mortgage
Eligible Rural Area
The actual map identifying eligible rural areas updates frequently, but the definition of a rural area according to the USDA is an area with a population below 35,000, rural in character, and lacking in mortgage credit for low- and moderate-income families.
USDA Loan Benefits
There are a few key benefits of a USDA Loan. The biggest factor for many is that no down payment is needed for those who qualify. This opens the door to homeownership for many who may have been blocked by a 5 percent to 20 percent down payment. Other benefits include competitive interest rates, low monthly mortgage insurance, and flexible credit requirements.
Loan Process
The USDA Loan homebuying process is not the same for every everyone, but there are a few steps that are common among different buyers. These include:
- Prequalifying with a USDA-approved lender
- Providing all documents needed for preapproval
- Finding a home that is USDA-approved in an eligible area
- Signing a purchase agreement and ordering a USDA appraisal
- Closing on your home
Guaranteed vs. Direct
There are two types of loans offered through the USDA. One is called the USDA Guaranteed Loan, and the other is called the USDA Direct Loan. The main differences between the loans are who funds them and their purpose. The USDA Guaranteed Loan is issued by a USDA-approved lender, and the USDA Direct Loan is issued by the USDA, who provides payment assistance in the form of a subsidy. USDA Direct Loans are typically reserved for homebuyers with significant needs, such as access to safe and sanitary housing, an income classification as low or very low, and an inability to obtain financing elsewhere.
A good starting point is to determine which USDA loan option best suits your needs and if you are eligible for one or both. As always, Mlend is here to help you navigate the USDA Guaranteed Loan process.