How Do USDA Loans Work

The US Department of Agriculture offers loans to families from the society's lower or middle-income strata to help them build or purchase their own homes. The funds can also be used to renovate existing homes or relocate to safer housing communities in the countryside. One of the biggest benefits of USDA home loans is that no downpayment requirement needs to be met. Applicants also do not need to meet the minimum credit score criteria. The most critical USDA loan requirement is that the income criteria must be met to qualify. Buyers must also ensure they stay in the property and use it as their primary residence. 

In this article, let's delve deeper and learn more about USDA loans. 

Knowing All About USDA Home Loans

What are USDA Loans?

The US Department of Agriculture encourages people from the economically weaker sections of society - those with low or moderate Income - to buy properties in selected rural areas. The loans are guaranteed by the USDA and are characterized as follows - 

• The property cannot generate income. Therefore, it should be used for housing purposes only, not for farming or other profit-making activities.

• The buyer has to live in the house, which should be their primary residence.

• The USDA home loan mortgage rate is fixed.

• The repayment term is a minimum of 30 years.

• The loan can be used to purchase or build a new property and renovate an existing house. 

• The house can be of any type - detached or attached modular, condos, single-family homes, or planned unit developments.

Types of USDA Loans

There are three different types of loans provided by the USDA. These are - 

USDA Direct Loans or Single Family Housing Loans

This kind of loan is meant for people with very low or low Income. They are eligible to buy their houses in a qualified rural area. The loan is offered as a subsidy or payment assistance to reduce the borrower's mortgage amount. Lenders depend on the adjusted family income metrics to calculate how much assistance can be offered to borrowers. Use a USDA home mortgage calculator to know how much you are eligible for.

You can avail yourself of a USDA direct loan at 4.75% at present, but with payment assistance, the interest rate can go down to 1%. The term of a direct USDA home loan is about 33 years, extendable up to 38 years for people from the very low-income group.

USDA Single-Family Housing Guaranteed Loan Program

Usda's single-family housing guaranteed loan program is directed toward low- and moderate-income buyers. Similar to direct loans, the properties eligible are in specific rural areas. However, these loans are not offered directly by USDA. These loans are available through approved lenders. The government guarantees 90% of the loans. Since lenders offer the loans, the interest rates can differ from lender to lender. It means that borrowers need to research and study the mortgage market to choose the best rate. The USDA loan requirement for Guaranteed Loans is - 

• Buyers do not mandatorily need to fulfill the minimum credit score criteria.

• No down payment is mandatory.

This USDA home loan is available for people who wish to build a property in a designated rural area. Borrowers have to be low-income or moderate-income. In this case, a USDA-guaranteed loan is combined with a construction loan. The loan is offered in the construction-to-permanent mode. The amount lenders give on the loan is based on the appraised value of the property. 

USDA Construction Loans

Individuals who are looking to construct their homes in an approved rural region can look forward to USDA construction loans. The loan merges a USDA-guaranteed loan with a construction loan, creating a combination construction-to-permanent offer. This makes the borrowing process easier as borrowers qualify, sign, and close on a single loan without any modification after completion of construction. 

Once approved, these funds can be used to cover all expenses associated with home construction, including lot purchasing, inspection fees, landscaping costs, construction administrative costs, and other qualified expenditures. 

Please note that the lender can use the appraised value of the home to determine and finalize the amount of borrowing. 

Comparing USDA Direct Loans with Guaranteed Loans

Who is Eligible for a USDA Loan?

Property Eligibility 

The property being purchased by a USDA loan must be in a designated rural area. As per the Congressional Research Service, places with 35,000 or less population are “rural in character.” Other than this, the property must be safe, decent, and sanitary. The other requirements for the USDA loan program are - 

• It can be a pre-built or a newly constructed property.

• It cannot occupy more than a 2,000 sq foot area.

• It cannot be used to generate income.

• It should have structural integrity.

• The house should be repairable with the loan funds.

• The property is inspected by a state-licensed inspector & needs to pass the inspection. 

• No in-ground swimming pool is allowed within the premises.

• It should have a proper wastewater and water disposal system.

Borrower Eligibility

To qualify for USDA home loans

• The person must be a citizen of the US. They can be a qualified non-resident or a non-citizen national.

• The applicant must have at least a 640 credit score (recommended).

• The Total DTI ratio is 41% (maximum).

• The property must be the primary residence of the applicant.

• The property can be a condo, attached or detached, modular, planned, or manufactured unit development.

Comparing USDA home Loans with Conventional Loans

Get the Best Mortgage Offer with Total Mortgage!

The USDA home loan is best for people with lower earnings. If you are interested in the USDA loan program, you can start by maintaining a high credit score and try to make a down payment while taking a loan. Also, you must keep your DTI ratio low by paying off your debt. Before finalizing the terms with a lender, compare the mortgage rates, closing costs, fees, etc., from all available lenders at Total Mortgage