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The United States Department of Agriculture (USDA) home loan program helps low-income residents in rural areas obtain mortgages at lowered rates without the need for a down payment. The USDA’s Rural Development department offers these loans to eligible buyers in certain rural and suburban areas. In particular, USDA home loans grant low-income homebuyers access to affordable financing.
What is a USDA Loan?
The USDA offers a variety of loans for both individuals and businesses, but the home loan is its most popular product. Homebuyers who are eligible for the USDA home loan program have two main options: the guaranteed loan and the direct loan. According to the agency, both loans are intended to make homeownership affordable and attainable for families living in less-developed rural areas of the U.S.
Guaranteed Loan: The guaranteed loan option has more generous eligibility guidelines than the direct loan, including a higher income limit than the direct option. This makes it the more popular choice of the two USDA loan programs. The USDA guarantees a large percentage of this loan, but applicants must go through an approved lender who will finance the loan itself.
Direct Loan: The USDA itself is the lender for direct loans. Formally known as the Section 502 Direct Loan Program, direct loans help low-income applicants purchase housing in eligible rural areas. If you’re a potential home buyer who meets the requirements, your mortgage payment can be temporarily reduced with a payment assistance subsidy. Interest rates can be as low as 1%.
USDA Home Loan Requirements
A USDA loan opens the door to homeownership for many buyers who would not be able to afford property otherwise, but you must meet eligibility requirements in the following areas.
Location: The property you’re buying with your USDA loan must be located in an approved area. Such areas tend to be in rural communities with populations that are below 35,000. This means that USDA loans aren’t available for homebuyers in most towns and cities. You can check the USDA Income and Property Eligibility website for a detailed map of eligible places.
Income limit: To be eligible for a USDA loan, you cannot earn more than 115% of the annual median income in your county or metropolitan area. Check your state’s income limits here for direct loans and here for guaranteed loans.
Credit History: Even if you have poor credit, you may still qualify for a USDA home loan. While a credit score of at least 640 moves you more quickly through the approval process, you can still qualify if your score falls below that number. However, you might have to undergo a more in-depth underwriting process. If you don’t have any credit history, you can also apply for a USDA loan with non-traditional references such as cell phone bills or rental agreements.
Applicant Requirements: The USDA guaranteed and direct loans start out with similar requirements, but the direct loan program has several additional rules. These loans are meant for two distinct groups, so it’s important to know which would be the best option for you and your family.
USDA Direct vs. Guaranteed Loan Requirements
The USDA direct loan is designed to support low income households who wouldn’t otherwise be able to secure any sort of home financing. This leads to more income restrictions on direct loans compared to guaranteed loans. The 502 USDA Guaranteed Mortgage is intended for rural buyers with higher income and credit limits. In short, direct loans have more numerous requirements while guaranteed loans have higher ones.
For both programs, all applicants must:
- Meet income eligibility.
- Live in the home as their primary residence.
- Be a U.S. citizen, U.S. non-citizen national or Qualified Alien.
- Be able to legally obtain the loan.
- Not be suspended or debarred from federal program participation.
- Meet credit obligations in a given time frame.
- Purchase a qualifying property.
There are some additional requirements for direct loan applicants. In addition to meeting the criteria listed above, they must show that they currently lack safe, sanitary and decent housing options. Direct loan applicants must also demonstrate that they have a very low income level and that they are unable to secure alternative financing from other sources.
USDA Loan Rates and Loan Limits
One of the major appeals of a USDA home loan is how low the interest rate is compared to other zero-down mortgage options. The current average interest rate for a conventional home loan in the U.S. is around 4%. Under the USDA Rural Development direct home loan program, the interest rate is 3.25%. The rates for the 502 Rural Development Guaranteed Loan are determined by the mortgage lending companies that partner with the USDA. However, the government’s guarantee on the 502 loan lets the lenders charge lower rates than for standard mortgages. Other determining factors that influence a guaranteed loan borrower’s individual mortgage rate include credit history and market conditions.
There are no loan limits on homes that a USDA loan borrower can purchase. Instead, the maximum loan amount is based on such personal qualifications as your income, debts, assets and credit history. But because the USDA loan program is intended for low- to medium-income borrowers, your income cannot exceed 115% of your county’s median income.
Mortgage insurance is also more affordable through a USDA loan than it is through private mortgage insurance. A USDA home loan mortgage insurance requires you to put down an extra 1% of the principal upfront, plus an annual fee that’s equal to 0.35% of the loan balance that year. Unlike the initial premium, the annual fee can be rolled into the loan amount if you can’t afford to pay the extra amount at the time you buy your home.
How Do You Apply for a USDA Loan?
One key difference between the USDA’s direct and guaranteed loan programs is that the direct loan is funded and managed directly by the agency. If you’ve decided a USDA direct loan could work for you, your first step is to contact your local USDA Rural Development office.
On the other hand, guaranteed loans are only insured by the government—you must find an approved lender who will actually finance the loan itself. This means that you’ll need to apply with a USDA home loan-approved lender rather than contact the USDA. Here is a comprehensive list of approved lenders in each state.