USDA Loan: What It Is, Eligibility, and How to Apply

USDA Loan: What It Is, Eligibility, and How to Apply
Written by Publishing Team

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If you prefer farmland to skyscrapers and the sounds of nature over traffic noise, a special type of government-backed funding may help you make a rural area your permanent home.

USDA loans are designed for very low-to-middle-income families who cannot obtain traditional financing and want the stability of home ownership.

Here’s what you need to know about USDA loans, including how to get one:

What is a USDA loan?

A USDA loan can help you buy, repair, renovate, build, or even move a home that you will use as your primary residence. In most cases, you are not required to make a down payment.

If you have a low to medium income and would like to be a homeowner in an area of ​​less than 35,000 residents, you may want to consider getting a USDA loan.

Learn more: USDA vs FHA: What’s the difference?

How does a USDA loan work?

USDA loans work a little differently depending on the type of USDA loan you get. There are three USDA home loan programs you can choose from:

  • USDA Guaranteed Loans: These loans are 30-year fixed-rate loans issued and financed by USDA mortgage lenders, who set interest rates. The USDA guarantees 90% of the loan amount to protect the lender if the loan is not repaid. The income limits for secured loans are higher than the limits for direct loans.
  • USDA Direct Loans: These loans are insured and serviced by the US Department of Agriculture. It can be up to 38 years and interest rates as low as 1%. To qualify, you must have a low or very low income for your area, not be eligible for other funding, and not have decent, safe, and healthy housing.
  • USDA Home Improvement Loans: Very low-income homeowners who cannot get other credit may be able to borrow up to $20,000 at a 1% interest rate to repair, improve, or upgrade a home in a rural area.

This article will focus on secured and straightforward loans.

While Credible does not offer USDA loans, we can help you find a great rate for a conventional loan. It’s simple and secure – you don’t even have to leave our platform.

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  • Simplified immediate pre-approval: It only takes 3 minutes to find out if you qualify for a simplified and instant pre-approval letter, without affecting your credit.
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  • Modern approach to mortgage: Complete your mortgage online with bank mergers and automatic updates. Only speak to the loan officer if you wish.

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Eligibility for a USDA Loan

You will need to meet certain eligibility requirements to qualify for a USDA loan.

USDA Eligible Zones

Guaranteed and direct USDA loans are available in areas with a population of less than 10,000 and sometimes in areas with a population of 10,000 to 35,000.

Find the address of the home you’re interested in on the USDA eligibility site to see if the home is in an eligible area.

USDA Ownership Eligibility

You must occupy the house as your primary residence. A single family home can be attached or detached. Manufactured homes are also eligible.

It must be publicly accessible, in all weather maintained by the local government or homeowners association, have a safe and adequate water supply, and can be disposed of with sewage.

The square footage of the property must meet USDA requirements:

  • content: There are no specific square foot requirements unless it is a manufactured home, which must be at least 400 square feet.
  • direct: Typically 400 to 2,000 square feet of living space (not including basements). Properties can’t usually have an in-ground swimming pool either.

Good to know: You may not use either type of USDA loan for property with income-producing features such as a barn, silo, or greenhouse, unless those features are not used or will be decommissioned.

USDA Loan Income Requirements

USDA loans are unique in that you can actually disqualify if you earn too much. USDA loan income limits depend on whether you are applying for a secured or direct loan.

  • content: You can earn no more than 115% of the average income in the area. You also cannot qualify for a conventional loan without private mortgage insurance (PMI).
  • direct: It should be considered low or very low income. Check the USDA direct loan limit tables for your region. However, if you do not have enough income, you may qualify for benefits as long as you can contribute 24% of your income to your housing payments.

Both loans are adjusted for location and family size. They also require that you have a history of fixed income that is expected to last. Plus, you can’t have too much debt relative to your income. The maximum debt-to-income (DTI) ratio for a USDA loan is 41%.

Good to know: For direct loans, if you have non-retirement assets in excess of $15,000 ($20,000 if you are elderly), you will be required to put the excess into your home purchase.

For example, if you are 35 years old and have $18,000 in savings, you will need to pay $3,000 in down payment and/or closing costs.

Discover: 5 Types of Mortgage Loans: Which is Right for You?

USDA loan credit score requirements

Both USDA direct and secured loans have no minimum credit score requirements. You can even qualify without points. Lenders will consider your payment history on items that may not appear on your credit report, such as rent payments.

It may be easier to qualify if your score is at least 640. However, under USDA loan rules, lenders cannot reject you based on your credit score.

advice: You can’t be late on any federal debt, and it’s also best that you don’t be late on your payments to private creditors.

USDA loan interest rate

To get a USDA secured loan, the lenders must decide the interest rate they offer you, but the rate must be fixed and the term must be 30 years. Shopping with several lenders can help you get a better rate.

For a USDA direct loan, you can familiarize yourself with the current rates on the USDA Direct Loan web page. As of January 1, 2022, the rate was 2.50% for low- and ultra-low-income borrowers. The effective interest rate will depend on market rates and whether you qualify for payment assistance, which can bring your rate down to as little as 1%. Most direct loans have fixed tenures of 33 years.

Good to know: Funding for the Direct Loan Program is available on a first-come, first-served basis each fiscal year. You can put yourself on a waiting list if you run out of money.

How to get a USDA loan

The first steps to getting a USDA loan depend on the type of USDA loan you want:

  • If you are looking for a secured loan: A good place to start is the USDA’s list of approved lenders. Keep in mind that the word “approved” is not the same as “recommended”. You still have to choose your lender carefully and apply with multiple lenders to find the best deal.
  • If you are looking for a direct loan: You do not need to find a lender. You will apply to the US Department of Agriculture for Rural Development. This government agency is your lender. Begin by completing the USDA Single Family Housing Self-Assessment. If you appear to be of good fit, you can submit a complete application through your local USDA service center.

Once the loan is settled, the process is similar to any other mortgage:

  1. Complete the loan application. You will provide your name, address, phone number, email address, Social Security number and the address of the property you want to purchase. You’ll also provide information about your monthly income, monthly debt payments, and assets, as well as whether you’re overdue or overdue in paying any debts or have a history of foreclosure.
  2. Get your loan estimate. If pre-approval can be obtained based on the information you have provided, you will be given a formal loan estimate that specifies the interest rate, fees, and length of mortgage the lender is willing to offer you.
  3. Compare loan offers. If you are applying for a secured loan, compare your loan estimates from each lender who has previously approved your application. Decide on the offer that works best for you, then let the lender know you want to proceed. You will only have one offer with a direct loan, because the USDA is the only lender.
  4. Go through the subscription. Once you comply with the lender, the underwriter will verify the information on your application and may request additional details and documentation. The appraiser will verify that the home is worth the amount that you and the seller have agreed upon. Finally, the title company will make sure that the property title is clean.
  5. Close on your loan. Conclusion is the last step in the process. Here you will carefully review and sign the closing statement and pay any closing costs. The lender will pay the seller, you’ll get the keys to your property, and you’ll officially become the homeowner.

It is also possible that the lender will reject your application. If this happens, ask the lender to explain why. This way, you will know what you need to change to get approval the next time you apply.

About the author

Amy Vinyl

Amy Vinyl

Amy Fontinelle is a mortgage and credit card authority and contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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