Q: Looking forward to getting out of town and finding a great older home farther from the suburbs than we expected. We’ve been paying high rent on low income for so long that we can’t save money, and the local mortgage lender who refused our application suggested we apply for a USDA home loan, but we don’t know what that means. What is a USDA Home Loan?
a: A USDA home loan could be a great option for you! The program is designed to help middle to low income buyers obtain loans to purchase or improve homes in rural areas. For years, most Americans in the country lived on farms and fields. The industrial age brought people to the cities, but eventually people started to tire of sidewalks and tall buildings and spread to the suburbs. The suburbs’ proximity to city job centers made living there more expensive, so many people who wanted to be homeowners found their prices out of the market and stuck in the cities. At the same time, the US Department of Agriculture (USDA) is becoming increasingly concerned about the declining economy and declining population in rural agricultural areas far from cities. Realizing that it could solve two problems with one program, the USDA began offering low-interest, no down payment and home improvement loans to homebuyers who met certain conditions and were willing to settle in rural areas. Here’s what you need to know about qualifying for USDA housing loans.
A USDA home loan is a government-backed loan that provides middle- to low-income US citizens the opportunity to own a home in certain rural areas.
Mortgage rates offered by traditional lenders are based on the lender’s perception of the borrower’s ability to repay the loan, interest, and the size of the down payment. Unfortunately, many low- or middle-income borrowers do not have enough money to pay their monthly bills and also save for a down payment. Low-income borrowers are less likely to have high enough credit scores, either because they have not established a credit history over time or because financial struggles have left some negative elements on their track record. The USDA mortgage removes these obstacles for borrowers interested in buying a home in certain rural communities with the goal of helping more people build wealth through home ownership, repopulating rural areas, and stimulating the economy.
A USDA home loan is a loan with no down payment, usually with low interest rates and long repayment periods.
The down payment and higher interest rates are often the biggest obstacles that low-income buyers have to overcome. Rent, utilities, transportation, and insurance costs (as well as food and medical costs) can quickly eat up your paycheck, leaving little to no savings. While these borrowers may be perfectly able to pay off the mortgage each month – they pay rent successfully – after all – they can’t save the thousands of dollars needed to make a large down payment. Even if they can collect a small down payment together, a smaller down payment can result in exorbitant interest rates to protect the interests of the lender in the event the borrower defaults. The USDA guarantees loans issued under this program, so that lenders can offer loans with no down payment and low interest rates. In addition, lenders can extend the repayment period further than they can for a conventional loan — 33 to 38 years, rather than the traditional 30 — making monthly payments smaller and easier for the borrower to manage.
There are three types of USDA housing loan programs: loan guarantees, direct loans, and home improvement loans.
The USDA loan program provides many avenues for low-income borrowers to purchase or improve their homes. The first path is through secured loans: local lenders choose to participate in the program and commit to supporting USDA regulations in lending, and in return USDA guarantees the loan (in case the borrower defaults, USDA will cover the lender’s financial losses, so the lender is at risk less). In this way, the borrower can work with a local bank and develop a relationship with the creditor that will build the community and support the local business while providing a service to the borrower. In cases where this is not an option, such as borrowers whose income is below the limit set by most local lenders, the USDA will issue the loan itself. The criteria and income requirements for these loans vary by region, but they also tend to have very low interest rates. Finally, the USDA offers loans and grants to help borrowers upgrade or repair their homes; A combination of grants and a USDA construction loan provides up to $27,500 in assistance to help borrowers improve the value and condition of their home.
USDA loans differ from traditional loans in several ways, such as down payment requirements.
USDA loans do not require any down payment, but this is really only the first of many ways that borrowers can benefit from USDA loans. Those with questionable credit history (there is no set minimum credit score) or non-traditional credit references can still apply and be approved. Incorporation fees and rates are lower than with traditional loans as well. However, USDA loans are limited to homes in rural areas (or sometimes disadvantaged suburbs), so borrowers cannot choose a home anywhere they wish. The USDA also reserves the right to determine the size and function of the home purchased. While the loan must be for a safe and sound home, it cannot be more than 2,000 square feet, must have a market value less than the local market value, and cannot have a swimming pool or be used for income-generating activities. This is to ensure that the communities and properties most in need of the stimulation provided by the program will come first. Finally, it may take a little longer for USDA loans to close. Borrowers with higher credit scores can see closings in as little as 3 weeks, but those with an unconventional credit history or whose eligibility requires further verification can take up to 60 days to close.
Applicants must meet certain requirements, such as not exceeding predetermined income limits.
Applicants themselves must also meet certain eligibility criteria. Buyers must be in a position to verify that they do not have safe, healthy and decent housing and that they cannot obtain a loan that they can manage from other lenders. The property that borrowers buy should be their primary residence: USDA loan requirements forbid the money to be used for second or rental properties, and they require a home on the property, because they don’t make land loans. The USDA sets income limits based on regional income averages, and a borrower’s income and assets cannot exceed this limit. These limits vary because housing prices cover such a wide range across the country; A low-income borrower in California may have a higher income than a well-off homeowner in an area where home prices are lower. Check your area for income limits. In addition, the borrower must be a US citizen.
Only participating lenders can issue USDA loans.
The USDA Home Loan Program is strictly regulated to enable the department to help those who need it most. As a result, the number of banks and mortgage lenders that can offer USDA loans is limited to those who are committed to fully meeting the lending and service requirements required by the program. The pool of participating lenders is also limited so that the USDA can carefully monitor the lending and repayment process. Some lenders prefer not to deal with extra paperwork and monitoring, while others are not willing to risk lending money to low-income borrowers or those with credit challenges, even with government support. You may need to contact the local lenders you wish to work with, or refer to the USDA eligibility page for contact information for participating lenders in your area or online.