Buying a home is a big deal, no matter the purchase price or down payment you plan to bring to the table. In addition to preparing to search for, make an offer on, and ultimately follow through with the purchase of a home, it is necessary to weigh the options for the type of home financing you will – or should – use. Buying a home takes a heavy dose of know-how, from realizing how much home fits comfortably into the budget to understanding the various home loan options available. One of those home loan options is the USDA Rural Development Home Loan program, more commonly referred to as the USDA mortgage, which offers housing assistance. Here’s everything you need to know about what it is, how it works, and who it benefits.
Just like VA and FHA home loans, USDA mortgage loans are backed by the federal government, specifically the United States Department of Agriculture. These home loans are used to finance the purchase of a residence located in a rural area, and they are focused on providing a path to homeownership for low- to moderate-income households. While borrowers are required to have relatively strong credit history to qualify for a USDA mortgage, there are various programs under the USDA that allow for little to no down payment and interest rates as low as 1%.
USDA home loans offer three different programs, including the single family direct homeownership, the single family guaranteed homeownership, and the rural repair and rehabilitation loan. Each comes with a different set of parameters and qualification criteria.
Under the Single Family Direct USDA mortgage program, low-income borrowers have the opportunity to finance the purchase, repair, or renovation of a primary residence in rural areas. Mortgage repayment terms can be extended up to 38 years for borrowers with an income below 60% of the average median income in the area, or 33 years for those above that threshold. To qualify, you must be able to afford the mortgage payment, including taxes and insurance, and you must be without adequate housing. Homes purchased with a Single Family Direct USDA mortgage are required to be modest for the area in which the purchase is made.
With a Single Family Guaranteed USDA home loan, low- to moderate-income households have the ability to purchase a modest home as their primary residence located in a rural area. Income cannot be higher than 115% of the median income for the area, and repayment terms are extended only to 30 years. All borrowers on the application must have strong credit as well as the ability to meet the monthly mortgage payment. These loans are issued through state housing agencies throughout the country.
Borrowers with low income may be able to qualify for a Rural Repair and Rehabilitation loan through the USDA. Under this program, eligible borrowers can utilize affordable funding to repair or improve their primary residence in an effort to make the home more sanitary, safe, or free from health hazards. Borrowers must make less than 50% of the area’s median income and be unable to qualify for affordable credit from other sources.
USDA home loans make it possible for individuals to purchase or repair a home in a cost-effective way, but this financing source is not suitable for borrowers with poor credit history. You must be able to show steady income within the parameters of the loan program you wish to use, as well as a strong history of on-time debt payments and overall financial responsibility.
One of the main advantages of the USDA mortgage program is the ability to purchase a home without the need for a hefty down payment. Both the Single Family Direct and Single Family Guaranteed USDA loans offer a low to no down payment provision, although some borrowers may be required to tap into accessible assets to contribute up front. In addition to the minimal down payment, USDA mortgage programs can offer an interest rate below average interest rates for conventional, VA, or FHA mortgage loans, as low as 1% for the life of the loan. All USDA mortgage programs are available with fixed repayment terms, with no option for an adjustable rate loan.
USDA home loans are not widely known, but the programs available through the federal government are a sound choice for low- to moderate-income earners who desire to live in a rural area. As with any major purchase, it is necessary to do your research prior to signing on the dotted line and spend time shopping around for the best-fit lender. Additional information about the USDA home loan programs is made available through the USDA website.
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