A USDA Home Loan, also USDA Rural Development Loan, is a no down payment home loan program which is offered by United States Department of Agriculture. It is offered to low and moderate income homebuyers in qualified rural and some suburban regions. USDA’s Single Family Housing Guaranteed Loan Program is intended to promote homeownership among individuals who might not qualify for conventional loans.
USDA home loans require no down payment from the buyer as the government will guarantee a certain percentage of the mortgage. The underwriting standards are also less strict compared to conventional loans to assist serve low to moderate income borrowers. Other characteristics of USDA loans include fixed interest rates as well as low mortgage insurance apart from the zero down payment.
USDA Loan Eligibility
In order to be eligible for a USDA mortgage, certain criteria must be met relating to the buyer, the home, and the location:In order to be eligible for a USDA mortgage, certain criteria must be met relating to the buyer, the home, and the location:
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The income for buyer does not qualify to earn beyond the income level of their zone. Though they differ with region, the USDA sets moderate and low income levels by a state or county’s median income. The moderate bracket applies to the majority of USDA loan borrowers.
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The home to be purchased has to be compliant with the USDA rules of moderation and the buyer has to use the home for occupancy for at least 80 years. Any type of home, be it an existing one or a newly constructed one, is acceptable. For instance, price limits are not a concern for the USDA, as they do not establish strict guidelines.
- The home must be situated in a qualified rural zone, which normally refers to a small town or city with a population density of less than 35,000 residents. USDA has made it easy for buyers to check if a particular area meets the qualification requirements by having a property eligibility map on their website where one enters a specific address and the system checks if the area qualifies. Some of the suburban areas neighboring rural areas may also be considered as eligible areas. More important than the number of people is the fact that the area does not belong to the urban environment.
USDA Underwriting Guidelines
Since USDA home loans are government-insured, the underwriting criteria take into account more than just the credit score and DTI ratio as with conventional loans. The general objective of the program is to assist eligible candidates to become homeowners and therefore the standards also consider the employment record, income security and absence of significant credit incidences in their past.
Key underwriting guidelines include:
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Most lenders require a minimum credit score of 640.
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DTI ratio of 29% for the front-end ratio and 41% for the back-end ratio for a manually underwritten USDA loan
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Check housing history, payment history, and current lease terms.
- Income that is constant and has been received over the last 12 to 24 months.
Benefits of USDA Loans
In addition to requiring zero down payment, USDA home loans offer multiple benefits to eligible buyers:In addition to requiring zero down payment, USDA home loans offer multiple benefits to eligible buyers:
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Low interest rates – While the interest rates of the USDA loan are generally low and fixed at par with conventional mortgage interest rates. They are constant for the entire term of the loan, and enable the buyer to get a cheap monthly payment. While the government guarantees the loan, the interest rate might be a bit lower than an equivalent conventional loan might be.
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Less costly mortgage insurance – A one off guarantee fee of 1% of the loan amount for mortgage insurance and an annual rate of 0. 35% on the outstanding loan balance will be charged to the buyer. Although the FHA has an upfront fee of 1. 75% or the conventional loan at 0. 5-1% per year, a USDA mortgage is cheaper in the long run.
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Credit score requirements – There are minimum credit score requirements of 640, however, it is more about the whole loan application and buyer profiles. Hence, items like medical collections or previous bankruptcy may be considered.
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No prepayment penalties – USDA mortgages have no prepayment penalty in case the buyer decides to pay off the home loan earlier, making it more flexible.
- Easy credit qualifying – USDA loans are relatively easy to qualify for when compared to other low or no down payment mortgage products because the credit qualifying is somewhat less restrictive to ensure homeownership in rural areas. The full loan review is aimed at weighing credit risk against the buyer’s reasonable ability to make the home payments.
How to Get a USDA Home Loan
First step in applying for a USDA mortgage is to identify lenders that offer USDA loans in the state and then find a loan officer who is familiar with the USDA program. By the specifics of the financial situation of the buyer, as well as the value of a property to be appraised, the lender will be able to set an exact loan amount and the terms of the repayment. They will also assist the buyer to compile all the relevant documents to support eligibility and underwriting approval.
This loan provides affordable home buying opportunity to the low and moderate income earners who else otherwise would not afford the expensive markets. They remain so because mortgage rates remain low and basic assurances that provide opportunities for worthy candidates to achieve the goal of homeownership in various rural areas of the country. USDA mortgage applicants should ensure they research on location requirements, condition of the home, credit history, and qualifying income levels of their household to know if they are eligible for USDA loan.
