In either case, if you need a mortgage to purchase a rural or even a not-so-rural home, a USDA loan could be an appealing option due to its low interest rates and no-down-payment requirement. This type of mortgage is offered through the U.S. Department of Agriculture’s Rural Development program, potentially allowing you to save money or move into your new home more quickly.
Let’s delve into the details of USDA loans, including who qualifies for the program and other relevant information.
What Exactly is a USDA Loan?
If you’re currently in the market for a home in a rural area, you may have come across the term “USDA home loan.” The USDA supports remote communities through its Rural Development program, which aims to create a sustainable housing market that provides modern and safe homes for individuals in less urban areas.
USDA loans offer numerous advantages for homebuyers. Eligible individuals with moderate or low income can secure a low-interest loan with no down payment through approved lenders, like JVM Lending, who are familiar with these types of loans.
Types of USDA Loans Available
The USDA offers two single-family housing programs tailored to different groups of borrowers. To find out about your county’s loan, income, and property eligibility requirements, you can utilize the USDA Income and Property Eligibility site.
1. Single Family Housing Guaranteed Loan Program
This program is designed for low- and moderate-income earners. Guaranteed loans provide financial advantages to homebuyers who need help to obtain adequate housing through conventional financing. It offers a zero-down home loan for those who may not meet the requirements for a conventional loan.
It’s crucial to note that USDA Guaranteed loans are not directly issued by the government but rather by private lenders. Lenders are more willing to take on borrowers they might otherwise be hesitant to consider due to the government’s backing against potential defaults.
2. Single Family Housing (SFH) Direct Loans
These loans cater to low- and very low-income households, with income levels defined as a percentage of the area’s median income. The SFH Direct Loan program assists qualifying buyers who lack safe and sanitary housing and aspire to become homeowners by providing payment assistance.
Determining USDA Eligibility
To qualify for a USDA loan, both you and the home you wish to purchase must meet specific USDA loan requirements. Let’s explore some of these requirements below.
Income Limits
Income limits are calculated as percentages of the Area Median Income (AMI) per household. You can find the income limits for the SFH Direct and SFH Guaranteed loan programs by using Fannie Mae’s Area Median Income Lookup Tool.
SFH Guaranteed:
- Very low income: Not available
- Low income: Not available
- Moderate income: Up to 115% of AMI
SFH Direct:
- Very low income: Below 50% of AMI
- Low income: 50% – 80% of AMI
- Moderate income: Not available
Property Eligibility
To qualify for a USDA loan, eligible homebuyers have the flexibility to choose from any of the USDA’s rural-designated areas. Many of these areas are more suburban than rural, offering a wider range of choices than anticipated with a USDA loan.
Credit Requirements for USDA Loans
Being eligible for a USDA loan does not guarantee approval. In addition to meeting the USDA’s requirements, you must also meet the requirements set by a mortgage lender. Most lenders typically require a credit score of at least 640 to approve a USDA home loan. However, in some cases, it’s possible to be approved with a lower score.
Pros and Cons of USDA Loans
While USDA loans offer clear advantages to eligible individuals, they also come with strict and strictly enforced requirements. A prime example is the USDA’s appraisal requirements, which can present unique challenges during the home appraisal stage.
Let’s take a closer look at the pros and cons associated with these loans.
Pros:
1. No-Down-Payment Option: USDA loans eliminate a major barrier for moderate- and low-income applicants by providing a zero-down-payment option. However, it’s essential to note that borrowers opting for this option will pay interest on the entire purchase price of the home, and they will start without any home equity. If you currently have a stable housing situation, it may be wise to wait until you can save up for at least a small down payment. However, if you lack suitable housing and do not earn enough to accumulate savings, there’s no need to delay applying for a USDA loan.
2. Lower Interest Rates: Even if low- or moderate-income earners meet the requirements for most conventional loans, they would likely face higher interest rates compared to borrowers with greater financial resources. However, USDA loans significantly reduce lender risk through government backing, enabling lenders to offer more favorable rates.
3. Availability to First-Time and Repeat Homebuyers: While some home-buying assistance programs exclusively cater to first-time buyers, USDA loans are suitable for both first-time and repeat buyers. Therefore, it won’t be a disadvantage if your USDA loan is not your first home loan. Nonetheless, as a first-time buyer, it’s advisable to explore the U.S. Department of Housing and Urban Development (HUD) database for local home-buying assistance resources.
Cons:
1. Appraisal Issues and Home Safety: Although USDA loans may resolve some appraisal issues, they can introduce others. USDA loans follow HUD appraisal requirements, which often involve additional testing to ensure the home is safe and healthy. Lenders focus on what they can recover in the event of a mortgage default. However, these additional requirements can create risks or inconvenience throughout the appraisal and home inspection process. For sellers who can choose from multiple offers, it makes sense to prefer offers backed by USDA-loan approval letters. Appraisal requirements may vary depending on the property’s location and the safety risks commonly associated with the area. Your USDA lender or local real estate agent can provide guidance on local health and safety testing requirements.
2. Upfront and Annual USDA Guarantee Fees: With a USDA loan, borrowers must pay a guarantee fee, which serves as the USDA’s equivalent of private mortgage insurance. The guarantee fee comprises an upfront fee and an annual fee paid by the borrower as part of their monthly mortgage payment. In 2023, the upfront fee is set at 1% of the loan amount, with an annual fee of 0.35% of the loan balance.
The Bottom Line: USDA Loans Can Be a Great Choice for Eligible Individuals
If you earn a moderate or low income and dream of wide open spaces or a place to call your own, a USDA loan can help turn your homeownership dreams into reality. At JVM Lending, we can assist you in achieving your home-buying goals through USDA home financing or any of our other mortgage products. We always prioritize consulting with you to find the best and most advantageous home loan option, regardless of your circumstances.
Are you ready to determine the ideal mortgage type for your financial situation? Apply online now to obtain the necessary information to make the best decision for you.
