USDA Home Loans: What to Know
The U.S. Department of Agriculture (USDA) has multiple programs that are designed to support those looking to plant long-term roots in more sparsely populated areas of the United States. USDA has both a loan guarantee program and via direct loans, allowing those with healthy credit scores to potentially purchase homes without a down payment.
Regardless of the type of financing you pursue, it is always a smart move to understand the different parameters of your loan. Using the TipRanks’ mortgage calculator will allow you to play around with the different variables and better understand how each one impacts both your monthly payments and the overall cost of your mortgage.
Supporting Rural Communities
The USDA’s mandate expands well beyond agriculture, with a multitude of programs covering everything to job training to infrastructure. The common thread connecting many of these programs is their objective of supporting the prosperity of rural communities and the families who call them home.
There are two main USDA home loan programs, which can assist prospective home buyers and current owners to purchase, build, or improve upon their place of residence. Qualified recipients of both programs can use them to purchase a home with no down payment.
These programs are available only in specific geographic areas. You can check the USDA website to view if you are looking in an eligible geography.
USDA Loan Guarantees
The USDA loan guarantee program is designed for those in a specific income range who are looking to purchase, build, or improve upon their primary residence in more sparsely populated areas. Via this program, the USDA will cover up to 90% of your home loan in the event of a default, significantly reducing the risk for lenders.
To qualify for the program, your earnings must be less than 115% of the median household income in the area in which you wish to purchase your home.
The lending terms will be negotiated directly with a private lender who is participating in the USDA home loans program. Lenders will want to see stable income and credit scores above 620, which is higher than the minimum range of FHA-backed loans.
Your debt-to-income ratio must be under 41%, meaning that the amount of that you will be paying on your debts going forward must not exceed 41% of your total earnings. In particular, your monthly housing payments cannot exceed 29% of your monthly income.
Aside from the limited geographic scope, the terms are required to be a 30-year fixed rate mortgage, which removes another level of flexibility.
Visit the USDA website to view a list of active lenders who are participating in the Single Housing Guaranteed Loan Program.
USDA Direct Loans
Beyond loan guarantees, the USDA also offers a Single Family Housing Direct loan program for those with incomes equal to or less than 80% of the median household income in their area. Beneficiaries must demonstrate that they are without access to safe, secure, and sanitary housing, and that they are unable to qualify for other traditional sources of mortgage financing.
Repayment terms are for 33 years, with an option to extend up to 38 years for very low income applicants. Interest rates are fixed and based on current market rates, which at the time of this writing are set at 4.125%. However, loan assistance is available, which can bring the effective rate you are paying down to 1%.
For those interested in the direct loan program, you can review the USDA’s website to discover if your income falls within the direct loan limits.
Conclusion: The Benefits and Drawbacks of USDA Loans
For those looking to build a life in rural areas, these USDA loan programs offer financing at advantageous terms that can help those without significant savings become homeowners.
The strict geographic limitations will only make this relevant for certain households, however. Another downside to consider: purchasing a house without a down payment means it will take longer for you to build-up equity.
Purchasing a house is a momentous decision, extending well-beyond a question of simple finances. USDA loans can place you in a home with no money down and with generous repayment terms. Before proceeding, it is important to understand if you are in a position to take-on the long-term obligations inherent with being a homeowner.
Regardless of the type of loan you elect to pursue, using TipRanks’ mortgage calculator can help you understand the contours of your financing plan, and how it will impact you in the months and years ahead.
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