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USDA Loans: Everything You Need To Know

If you're dreaming of owning a home in a rural area, you might have come across the term "USDA loan" in your research. But what exactly is a USDA loan, and could you be eligible for one?

The USDA (United States Department of Agriculture) provides a unique home loan program to promote homeownership in rural and suburban areas. In this article, we'll delve into the details of USDA loans, including their features, eligibility requirements, and benefits. Whether you're a first-time homebuyer or considering refinancing, read on to find out if a USDA loan could be the key to achieving your homeownership goals.

What is a USDA Loan in Mortgage?

The USDA home loan is one type of mortgage that offers competitive rates and makes purchasing a home more affordable for low-income rural residents. USDA loans are backed by the Department of Agriculture similarly as how the Department of Veterans Affairs supports VA loans for eligible individuals such as veterans and their families.

As a result of this government backing, mortgage lenders can offer lower interest rates than conventional loans in many cases. If you qualify, you can purchase a home without a down payment, but you will still have to pay closing costs.

Types of USDA loans

USDA Loan guarantees

The USDA guarantees mortgages issued by participating local lenders, allowing borrowers to qualify for low mortgage interest rates without paying a down payment. Despite not having to pay PMI, borrowers must pay an upfront fee of 1% and an annual fee of 0.35% of the loan balance. Typically, this costs less than traditional PMI.

USDA Direct loans

The USDA offers these mortgages to low- and very low-income applicants who need access to traditional mortgages. It depends on where you live. Regions have different income thresholds. Subsidies can lower interest rates to as low as 1%. Term lengths of up to 38 years are also available with these loans.

Homeowners whose market value is below the area loan limit may qualify for USDA direct loans. The loan limit can reach $700,000 or more in pricey markets such as California and Hawaii. However, most rural areas have loan limits closer to $330,000.

USDA Home improvement loans

Homeowners can use these loans or grants to repair or upgrade their homes. Grants can be at most $10,000, while loans can be at most $40,000. You can also combine a loan with a grant, resulting in total assistance of up to $50,000. The loan term is for 20 years with a 1% interest rate. A borrower must repay any grant if they sell the house within three years.

USDA Loan Eligibility Requirements

Home buyers must meet USDA eligibility requirements to be considered for USDA construction loans or USDA loans for home purchases. For example, you must live in the property, or it must be your primary residence. The following is an overview of the other requirements.

  1. Residency

You must be an American citizen, a noncitizen national, or a permanent resident alien.

  1. Location

Applicants for USDA loans must live in an eligible rural area. The USDA offers a loan eligibility map on its website to help you determine if your home qualifies. Visit the USDA's eligibility site  to view a map of loan eligibility to determine if a home qualifies. With this interactive map, you can search for a specific property to see if it falls within a USDA-eligible geographic area.

  1. Income

Make sure to c heck your income eligibility at the same time you check your property eligibility. The USDA provides loans to families struggling to make ends meet, so your adjusted gross income can be at most 115% of the local median income. Click on the link to the USDA's eligibility site, but select "Income Eligibility.".

Furthermore, your assets, savings, and current income must demonstrate that you can make your mortgage payments consistently for at least 12 months. If you apply for a USDA loan, your lender will also consider your debt-to-income ratio  (DTI). The recommended DTI is 43% or lower to give yourself the best chance of qualifying.

Divide all your monthly recurring debts by your gross monthly income to calculate your DTI ratio. Payments for student loans, auto loans, rent, and credit cards should be included in your monthly expenses. You do not need to have food and utilities.

  1. Credit Score

Most lenders require an average credit score of 640. You may still qualify if your score is close to that or below. Find out what your options are by talking to a lender.

Getting a Single Family Housing Direct Home Loan

Specific low-income borrowers can also receive loans directly from the USDA. An applicant for a Direct Home Loan for Single Family Housing must:

  • Meet income limits determined by county and metro area
  • Have no "decent, safe, and sanitary" housing
  • Need help to obtain another type of mortgage
  • Either be a U.S. citizen or an eligible noncitizen

Single Family Housing Direct Home Loans  aren't available to borrowers prohibited from federal programs, and the loan cannot be used to finance a property valued above the area's loan limit.

What is the difference between USDA Loans and Conventional Loans?

There are two types of mortgage loans you can get to finance your home: USDA loans and conventional loans . "Conventional" refers to a type of mortgage that isn't backed by the government, unlike FHA or VA loans.

They are all repaid in the same way - monthly payments with interest. However, USDA loans differ from other government loans in a few ways, such as the down payment, guarantee fee, and appraisals.

Bottom Line on USDA Loans

Rural residents who qualify for USDA loans can purchase a home more affordably. You may be eligible for a lower interest rate and will not have to make a down payment, though you will still pay closing costs. You can check your income and address on the USDA eligibility website to see if you qualify. Still, it is always best to speak with a mortgage expert.

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