What Is a USDA Loan

If you’re looking for a mortgage with no down payment and flexible lending requirements, a USDA loan could be right fit for you. These loans are specifically designed to encourage people in rural and suburban areas to become homeowners. Here, we will help you get a better understanding of what these loans are, what they can offer you and how to qualify if you decide to do so.

A USDA home loan is a type of mortgage loan provided by the United States Department of Agriculture. It could be a great mortgage option for eligible homebuyers because it lets them buy a house with no down payments. These loans are issued through the USDA Rural Development Guaranteed Housing Loan Program.

This program offers 100% financing, making it an impressive option for borrowers who may not able to qualify for conventional or FHA financing.

The loans they provide are a popular option for younger buyers who would like to move to a suburban area but have no money saved up to put it as a down payment.

The maximum amount for this loan is not specified and it can be used to finance up to 102% of the estimated value of the home.

If this loan sounds like a good option for you, do not forget that the home you want to purchase must be located in an eligible rural area.

How Does a USDA Loan Work?

The United States Department of Agriculture (USDA) offers a loan program that gives the opportunity to low- and moderate-income individuals to purchase a home in rural areas with no down payment. This loan program is available through participating lenders across the country.

If you get funding from this loan, you can use it to purchase a new home or already existing one or even for financing home repairs and renovations. Additionally, USDA land loans can be a great choice if you need some land for farming.

How to Qualify for a USDA Loan?

These loans often called “USDA rural development loans” have a relatively easy qualification process. The main criteria are that your income is below a certain level and the home you want to purchase is in an eligible area.

First and foremost, the USDA uses median income levels for each county in the US, so you should look up the median income of the country you want to move to. Generally, if your income is below 80% of this amount, you may be eligible.

Second, the areas in which you will be able to purchase a house must be categorized as “rural“ or “underdeveloped”. The list of these areas can be found on USDA’s website or you can just find a real estate agent and go from there.

There are also some other requirements such as:

• You must be a U.S citizen or permanent resident.
• You are unable to get funding from another source.
  

Being able to qualify for this loan doesn’t mean you shouldn’t consider higher interest rates than a conventional loan has. Although it can be tempting considering the amount of funding you can get this way.

Different Types of USDA Loans

There are a few different USDA loan types available for you to choose from. Each of them has its own benefits you should know and think about before you decide which to apply for. Here are the three most common ones:

• Guaranteed USDA loan
• Direct USDA loan
• USDA home repair loan

Guaranteed USDA Loan

This is the most popular type that USDA has to offer. It is backed up by a government and this puts lenders at less of a risk because if you halt on the loan USDA will pay it off. They are easier to get approved for and usually have a lower interest rate. This type is offered to borrowers with low and moderate incomes who are probably not eligible to get other types of funding. If this is a loan you want to get, what you need to do first is contact a participating lender.

Direct USDA Loan

A direct loan is another type of loan offered by the USDA. The main difference is that this one is not backed up by a government so there is more risk for a lender. Naturally, that makes them harder to qualify and get approved for. With them also comes lower interest rates but a bigger risk for you because there is no government to back you up if you default.

Like a guaranteed loan, you can also use these funds for buying a new or existing home.

USDA Home Repair Loan

This loan issued by USDA is meant for people who own a home in a rural area but want to do some repairs and renovations on it. The USDA offers two types of loans for this purpose:

• Single Family Housing Repair Loans and grants program
• Multi-Family Housing Repair Loans and Grants program.

An obvious difference between them is the number of families living under one roof.

In regards to this, the best type to qualify for depends on your needs and goals.

USDA Loan vs. FHA Loan: What’s the Difference?

When researching different types of a mortgage you can get, you surely stumbled upon the two most common ones- USDA loans and FHA loans. Here is a little guide on how to differentiate them.

USDA loan is a government-backed-up type that offers loans for rural homeowners. On the other hand, the FHA loan is also a government-backed up program that offers loans to all homeowners.

For starters, both being backed up by the government, a USDA loan is available to rural area homeowners. While on the other hand, an FHA loan is available to all homeowners no matter their location.

Another difference between them is the interest rate. USDA loans tend to have lower interest rates because they are considered more low-risk.

If you are unable to provide a down payment, USDA will be a better option, because FHA loans require a minimum of 3.5% as a down payment for a house.

Assuming that your credit is not that good FHA loans could be your only option. They require a score as low as 580, and as for the credit score for USDA loans you’ll need at least 640.

Choosing the right type for you must consist of looking at all of these differences and asking yourself what terms are more manageable for you. After this USDA loan application process is relatively easy.

What Are the Requirements for USDA Loans?

Set requirements for different types of USDA-offered loans are pretty much the same and they all include the following:

• Be a U.S citizen or have a permanent resident
• Have a good credit history
• Have good income
• Interest in buying a property in the rural area

Be sure to check your USDA loan eligibility before submitting any loan application no matter the type you choose.

Final Thoughts

When it comes to buying a home, there are many options available for future homeowners. These USDA loans could be a great option for anyone not eligible to get a more traditional loan or those who don’t have a down payment to provide. Borrowers looking for a home in a more rural area can get a great deal and good terms.

In this article, we provided an overview of these loans but if you consider applying for any, do your research to find the option most suitable for you.