When you hear the term USDA, you might not think about mortgages. But, if you’re considering buying a home in a rural area, a USDA loan could be the best option for financing your purchase.
If you’re asking yourself, “What is a USDA loan?” you’re not alone. Many homebuyers are not aware of the differences between a standard conventional loan and a USDA loan. To decide whether this type of loan is right for you, it’s important to understand how USDA loans work, the types available and the steps you’ll need to take to get one. Here’s a closer look at what you need to know.
What is a USDA Home Loan?
The USDA home loan is a zero-down mortgage program that is backed by the USDA. It is designed to help families in rural and suburban areas purchase homes by providing affordable financing.
USDA loans are a specific type of mortgage that offers very low-interest rates and even the ability to forego a down payment.
USDA Loan Eligibility Requirements
To qualify for a USDA loan, you must be a U.S. citizen or permanent resident and must be using the loan to purchase your primary residence.
One of the most unique qualifiers of the USDA loan program is that the borrowers’ total household income cannot exceed the USDA loan income limits in their area. Currently, the USDA income limit for 1-4 member households is $110,650 and for 5-8 member households, the limit is $146,050.
You’ll also need to show that you have a stable income for two years and a solid credit score, which is typically at or above 640. It is sometimes possible to qualify with a lower score. In this case, you’ll want to work with a qualified lender to review your options.
The lender will examine your debt-to-income (DTI) ratio, which is the total of your monthly recurring debts (like rent, car payments, credit card payments, and student loans) divided by your gross monthly income.
In most cases, the lender will want to see a DTI that is 41% or lower.
To summarize, if your combined household makes less than the local income limit, your credit is 640+ and your DTI is 41% or lower, you may be eligible for a USDA home loan.
USDA Loan Property Eligibility
While USDA loans are very appealing, one of the biggest differentiators of this program is that buyers can only use them to purchase properties in USDA-designated rural areas.
The good news is that close to 97% of the United States falls within this designation. This includes many suburbs and small towns. To see if the area you’re located in is USDA loan eligible, get in touch with a specialist at Paddio.
Types of USDA Loans
There are three different types of USDA loans: guaranteed, direct, and home improvement loans. Let’s take a closer look at each option.
Single Family Housing Guaranteed USDA Loan
The single family housing guaranteed USDA loan is issued by lenders and are insured by the USDA. This guarantee reduces the risk for the lender, which allows them to offer competitive loan terms. The Section 502 Guaranteed USDA Loan Program helps borrowers with low-to-moderate income purchase homes that are adequate, modest, decent, safe and sanitary.
With a USDA guaranteed loan, you are able to purchase, build, improve, or relocate a home in an eligible area.
Single Family Housing Direct USDA Loan
Ideal for low-income and very-low-income borrowers, direct USDA loans are provided by the USDA. This means that the USDA is your lender, rather than a bank or mortgage company. The main differentiator between the USDA guaranteed and direct loans are where the funding is coming from.
Home Improvement Loans
The Section 504 Home Repair program helps low-income homeowners fund needed repairs or remove health and safety hazards.
USDA Loan Process
The process of getting a USDA loan is fairly simple and isn’t much different than the steps you would follow to get a conventional loan.
1. Gather Your Documentation
You’ll need to provide some basic documentation during the loan process, so it’s helpful to gather this before you get started. Some of the items required include information about your household income, such as pay stubs and W-2s or 1099s. Your lender may require other information as well, but getting these basic items together ahead of time will make the process go much smoother.
2. Get Preapproved
Your lender will review all of your income, debts, and credit history. Then, they’ll let you know how much they’re willing to offer you and issue your preapproval letter.
3. Find Your Home
Once you’ve been preapproved for your USDA loan, you can confidently start your search for the perfect home. Remember to make sure the homes you're looking at are located in USDA-designated areas.
4. Complete To-Do’s
Once your offer is accepted, your lender will get to work reviewing everything. Don’t be surprised if your loan team reaches out. They’ll likely assign you some more to-do’s, like securing homeowners insurance or uploading additional documentation. At this point, there is usually an inspection by a third-party appraiser to ensure it meets all of the USDA guidelines.
5. Get Final Approval
If everything checks out, your lender will submit your application to the USDA for final review. At this point, you’re almost done.
6. Close on Your Loan
Finally, you’ll sign any remaining documents required to close on your loan. Once that's done, you'll be the proud owner of your new home!
Is a USDA Loan Right for You?
If you prefer life away from the big city, buying a home with a USDA loan might be the perfect solution for you.
The experts at Paddio can help you take a closer look at the ins and outs of USDA loans.