The United States Department of Agriculture supports the USDA Rural Development loan, also known as the Single Family Housing Guaranteed loan. This mortgage loan is designed to assist low- and moderate-income households with purchasing decent, safe, and sanitary homes in approved rural areas. No money is required down, and additional costs are low and affordable. Valid properties can be new, existing, or rehabilitated as long as the buyer will inhabit the home as their primary residence. Eligible applicants for the USDA loan must meet income and geographical requirements.
Maximum income limits help ensure that the needy households intended to benefit from the program are the ones receiving assistance. Income guidelines are available for review on USDA’s website: rd.usda.gov. Restrictions vary from state-to-state and even among counties and parishes. Income guidelines are set with per capita income considered, so the figures vary across the nation. Typically, within a state, higher income limits are observed around more densely populated areas. Statistically, city dwellers earn higher incomes, which is why USDA has also enforced geographical restrictions. Income limits are adjusted based on the number of people in a household and the limit increases for each additional household member. The household income is comprised of all income-earners who will be residing in the purchased home, whether or not they are borrowers on the actual mortgage.
Eligible properties must be located within USDA-defined rural areas. USDA’s website has a search option that will determine a specific address or region’s eligibility. Particular areas of the U.S. can be searched and viewed and the map indicates whether or not the subject area is geographically valid. On the interactive USDA rural eligibility map, users can zoom in and out to view various parts of the nation. Ineligible areas are highlighted in yellow. The map can zoom in enough to reveal specific addresses, but if the user is trying to establish which areas are USDA-approved, the map search can be limited to neighborhoods or cities. Although geographical restrictions may initially be discouraging, the majority of U.S. terrain is actually considered rural by USDA’s standards. Most small towns and suburbs outside large city limits are included. Also, as mentioned, USDA will guarantee new constructions in up-and-coming rural neighborhoods as well as existing homes.
USDA funds can be used toward a number of purposes:
- Purchase an existing or new dwelling to be used as the primary residence
- Make repairs as deemed necessary by home inspection professionals
- Energy efficiency-related home modifications
- Essential household appliances and equipment (i.e. flooring, ovens, refrigerators, air conditioners)
- Customary fees for installation, connection, and assessments
- Costs associated with preparing a site for home construction (i.e. grading, foundation, sodding)
- Repairs or updates to accommodate a physically disabled household member
- Taxes and other fees that are due at closing
Buyers who aren’t ready to commit to a specific property or realtor can use USDA’s website to answer most property-related questions and learn more about what the USDA funds can be used for. Also listed are approved lenders that can determine an interested applicant’s eligibility.
USDA eligibility standards are lenient in comparison to traditional mortgage loans. Aside from the income and geographic requirements, USDA approval is very generous and accommodating for modern financial and household situations. While other mortgage loans require applicants to meet a certain income, USDA sets maximum income limits. The USDA program helps lower and moderate income U.S. citizens achieve homeownership in rural areas. By providing affordable housing, communities will grow and thrive and the overall quality of life is positively impacted. Since the income restrictions are in favor of lower earners, many applicants who may have been turned down elsewhere may be approved for a USDA loan via an approved mortgage lender. A maximum debt-to-income (DTI) ratio of 41% is enforced. USDA does not set maximum purchase price amounts, but the applicants’ DTI including the proposed mortgage payment must not exceed 41% or the applicant will need to find a different property with a lower purchase price.
The USDA Rural Development loan is among the most accepting in regards to credit history. FHA requires a FICO score of 640 and some conventional programs accept nothing less than 740, but USDA will approve applicants with scores as low as 620, which is well below national average. Because of the guarantee from the United States Department of Agriculture, USDA lenders are allowed to safely loan to riskier buyers who have lower credit and income without the possibility of loss due to mortgage default. Negative credit events like foreclosures, short sales, and bankruptcies are not immediately disqualifying for USDA loans. Approved lenders are encouraged to look past individual credit events to consider the applicant’s overall credit worthiness. A current, positive credit portfolio with no recent late payments or collection accounts may qualify an applicant for a mortgage.
There are many mortgage programs on the market today that offer a variety of benefits to buyers. The reason USDA has been a forerunner in recent years is because of its unparalleled affordability. Not only is the loan 100% financing, requiring No Down Payment*, it also features low costs and fees.
Since the USDA loan is a zero-down mortgage, all loans are subject to mortgage insurance fees. All mortgage loans, regardless of program, require mortgage insurance if the down payment is less than 20%. USDA uses buyer-paid mortgage insurance premiums to continually fund the program. USDA mortgage insurance is separated into an upfront fee and an annual fee. As of October 2016, the upfront fee paid at closing is 1.00% and the annual fee is 0.35%. For example, a $200,000 home will require a $2,000 fee at closing and a $58.00 monthly fee. Instead of requiring the upfront fee at closing, USDA allows the mortgage insurance to be rolled into the total loan amount and paid out in small monthly payments. For comparison, FHA charges mortgage insurance at 1.75% upfront and .85% annually. The FHA upfront fee isn’t financed into the loan amount.
Another constant among financed mortgages is the necessity for closing costs. Closing costs are used to pay for third-party services like appraisals, credit checks, and title work. Since it’s against regulations for a mortgage provider to also supply these outside services, they must be performed by designated professionals and paid accordingly. The closing cost amount will vary among lenders and mortgage loan types. Despite being free of down payments, USDA loans still come with a set of closing costs. The total costs are due in full, but they can be gifted by a family member if the buyer doesn’t have the funds available. USDA will also allow the seller to cover up to 6% of the purchase price in closing costs. Since closing costs rarely exceed 4%, this is more than enough to allow the buyer to complete the closing with no money out-of-pocket. When the seller covers the costs, they aren’t actually paying for them, but instead the house’s purchase price is raised to cover whatever the costs equal. As long as the appraisal allows for it, this practice is very beneficial and convenient to buyers who wish to reserve as much of their cash as possible.
The USDA’s Rural Development website, rd.usda.gov, provides a number of resources for those who are interested in learning more about or applying for the USDA home loan. Users have an option to browse requirements by state and search RD properties for resale. There are a number of programs within USDA that offer housing assistance to households in need. Each state implements various assistance programs for eligible applicants made possible through respective local legislation. Since the USDA works with non-profit organizations, several grants are given each year. Online literature via rd.usda.gov can answer almost any USDA-related question anywhere from how and why it was developed to how it is still maintained.
To better understand USDA’s determinability, the Economic Research Service division compiled a study of socioeconomic factors for all counties and cities/towns within a given state. Called The Atlas, it assembles statistics for three factors: people, jobs, and county classifications. Similar to the rural eligibility map, The Atlas is an interactive map that users can use to navigate data within specific counties or regions. Each county lists the indicators for each factor within the three categories and users can choose to download additional data. These studies are part of how rural eligibility is determined.
The USDA is committed to keeping U.S. citizens informed about socioeconomic events and statistics and is determined to improve the qualify of life in rural regions of the nation. Just one of their programs, the USDA Rural Development home loan, makes it possible for countless Americans to afford to buy homes when it wouldn’t have been possible before. By assisting these qualified buyers with homeownership, the USDA is helping to grow and improve underdeveloped communities.