Guide to USDA Home Loans and how to get them
If you love the quiet and simple rural life, USDA home loans may just be what you need to own that house you’ve always wanted.
And if you thought you’d be surrounded by farms and cows, you are wrong. 97% of the country is in an eligible rural area.
The United States Department of Agriculture seeks to provide home buyers an opportunity to purchase homes in qualified rural and suburban areas.
If you qualify for these zero down payment loans, you can get funded directly by the USDA or guaranteed for loans offered through other lenders.
What are USDA home loans?
In a bid to stimulate economic growth in the rural and suburban areas, united states through the United States Department of Agriculture (USDA) is providing a mortgage option to its citizens who want to buy a home in an eligible rural area. While this type of loans is provided by private lending companies, they are guaranteed by the USDA.
Why homebuyers take USDA home loans
The primary purpose of a USDA loan is to offer affordable house ownership opportunities to low-income earners. Since the loans are guaranteed by the USDA, private lenders will take more risk and give qualified homebuyers reasonable rates and terms.
Some of the key advantages of USDA home loans are:
- No down payment needed
- Comes with competitive interest rates, making them a cheap home financing alternative
- Low monthly mortgage insurance
- Requirements to get the loan are flexible
With USDA loans, low-income earners and first-time homebuyers who can’t afford the traditional 5-20% down payment have a chance to own a home. Nevertheless, this loan product comes with its rules and requirements like eligibility requirements for the homebuyer and the property. Additionally, private lenders will have their internal guidelines on top of those imposed by the USDA.
Who is eligible for the USDA loan?
You need to meet the credit and revenue terms and conditions set by the USDA and private lender to qualify for the loan.
The USDA requirements include:
- Must be a US citizen or permanent resident
- Must have consistent income, mostly two consecutive years
- Capability and willingness to pay back the loan
- Work with a private lender who is approved by USDA
- Have a good credit rating for the loan, preferably 620-640 or higher
USDA Income Limits
Since the loans are specifically designed to help low-income earners own a home, the USDA has set minimum income limits depending on the location of the home and the size of the family. The limits are:
- Household of 1-4 members have an income limit of $82,700
- Household of 5-8 members have an income limit of $109,150
USDA tallies the cumulative income of each adult member in a family towards the USDA income limit, irrespective if they are part of the mortgage. When counting the annual income for the whole household, the USDA will use the adjusted annual revenue that takes account of approved deductions such as child care, medical expenses among others.
Note that these loans are accessible to people who want to buy homes in rural and suburban regions. According to the USDA, any place with a population of 35,000 is a rural area and has a serious shortage of mortgage credit for low-income households.
Then again, the USDA loans are accessible to homeowners who wish to buy a single-family house that will be their main residence. Homes with acreage might qualify if the size of the location is the area and not used for profit-making purposes. Profit making structures and vacation homes are not eligible.
Interest rates for USDA loans
Currently, USDA home loans are known to offer the lowest rates in the marketplace.
While the rates on these loans are defined by multiple contributing factors, the main determining factor is your credit profile, just like other mortgage alternatives. Even though debtors with poor credit can still be accepted for a lower rate because of the guarantee, homebuyers who have more-than-stellar credit rating will benefit from competitive rates.
Since the USDA does not set interest rates for the loans, private lenders have the freedom of setting their own rates.
How to get a USDA home loan
- Prequalification of the loan
Prequalifying for the loan is an easy task that gives you an estimation of what you can manage to pay for, and if you are eligible for the program. In this step, the creditor will confer the amount you can afford and any hindrance that might prevent you from qualifying for the loan.
You need to give your lender the following info:
- The total amount you want to borrow
- Your gross monthly revenue and other properties under your name
- Cumulative monthly loans
The majority of lenders will conduct a hard credit check, but not without your permission.
This is where you take account of your financial situation.
Your lender will verify the details about your finances and income. You need to come with the following documents.
- Social security awards letter
- Bank statement
- Photo ID
- Pay stubs
- W-2 and tax return
While more paperwork is involved in this stage, the lender will take your offer seriously once it passes the pre-approval stage.
Note that passing the pre-approval stage does not imply that you will get a home loan from USDA. This is because there are other additional conditions that you need to meet for final approval. They include satisfactory evaluation and additional verification of income and employment.
- Get a USDA-eligible house
If you have no clue, hire a skilled realtor and start searching for your dream home. Make sure you get a realtor who has an experience in USDA homes to help you find homes that are USDA approved.
- Sign the buying agreement
Once you get a perfect house, work with your creditor and the realtor to make a purchase. Try to negotiate with the seller to take care of some of the closing costs.
After you and the seller sign the buying agreement, the creditor will order a USDA loan evaluation to protect the buyer. The work of the appraiser is to make sure the house is in good condition, and it meets the USDA standards.
- Processing and closing
While your application is under contract, the underwriter will appraisal the details and inspect to ensure your application and paperwork are truthful and accurate.
Note that the underwriting procedure for USDA mortgage might take longer than conventional mortgage since the loan must be approved by two parties.
The creditor will underwrite the loan documents to make sure all the USDA requirements are met. The USDA will underwrite the paperwork, either manually or automatically.
The moment the two parties are satisfied, your creditor will give you a clear to close, and you will proceed to the last step, which is loan closing. Here, you will sign some documents, complete your USDA mortgage and take ownership of the new house.