For rural homebuyers, USDA loans are zero down payment. These mortgages are normally for people who are not wealthy and cannot qualify for a traditional mortgage. USDA loans are backed by the US Department of Agriculture and low-interest mortgages are specifically designed for Americans who have low-to-moderate income.

What is a USDA Loan?

There are different types of mortgages with their own requirements and guidelines. USDA loans are offered through the United States Department of Agriculture program for the US residents who have low-to-moderate income. USDA loans are zero down payment, low interest loans for the rural homebuyers who are eligible. The USDA loan program is also known as USDA Rural Development Guaranteed Housing Loan Program.

The accessibility of USDA loans is easier to the people. In the year 2017, with the help of USDA loans, 127,000 families bought and updated their homes.

Types of USDA Loans

There are three different types of loans which are offered under the USDA Loan program. These types are described below:

  • Guaranteed USDA Loan

The United States Department of Agriculture (USDA) partners with local lenders in order to offer guaranteed loans. Guaranteed loans by USDA means that some part of the loan is insured by the United States Department of Agriculture (USDA) which decreases risk in case the borrower defaults on the loan. Hence, the lenders feel comfortable while lending these loans and offer lenient loan terms to the low-to-moderate income with less favorable credit scores. Guaranteed USDA loans are well suited for the borrowers who have low to moderate income. In order to be eligible for guaranteed USDA loan, the adjusted household income should not exceed more than 115% of the median income of the family members. This household income generally is the combined income of the applicant and every other member in their household.

>>More: USDA Loan Rates and Requirements

  • Direct USDA Loan

Direct USDA loan is a type of loan where the USDA funds the borrowers directly. This means that instead of a bank, your lender is USDA directly. Direct USDA loans are given out to people with low and very low income who are not able to access any other type of financing schemes. The income of the qualifying borrowers must fall into the income limit of the designated area. For example, in some areas the income limit is even below $17000.

  • USDA Home Improvement Loans

USDA Home Improvement Loans offer loans to the low-income borrowers who want to repair their house or enhance their homes. USDA can even combine these with grants which the borrower does not have to pay back but this depends on the circumstances of the borrower. In order to get USDA home improvement loan, you must fall into the following eligibility criteria:

  • The borrower is unable to obtain affordable credit elsewhere
  • The family income is below 50% of the median income in the area
  • In order to avail grants, the age of the borrower must be 62 years old or greater and must be unable to pay back the repair loan.

How does the USDA Loan work?

Each year, the aim of the United States Department of Agriculture (USDA) is to support people with low income. The rate of interest on USDA loans is as low as 1% and you can secure this loan with a credit score as low as 640. The monthly payments associated with USDA loans are usually restricted to 29% or less of your monthly income. Other than this, the other monthly payments of the borrower should not exceed 41% of their monthly income.

With the help of USDA loans, you can only purchase homes in designated rural areas. This loan is not for the people who are living in metropolitan areas. However, the broad definition of rural under USDA Loans, many sub-urban areas and major cities near the rural areas are included.

Since the down payments for USDA loans is extremely low and zero in majority of the cases, the borrowers have to pay mortgage insurance premium which is usually 1% to 2% of the loan amount. Moreover, the majority of the USDA loans are not offered directly through the United States Department of Agriculture (USDA). Instead, they are offered by traditional mortgage lenders such as banks. However, these loans are backed by the United States Department of Agriculture (USDA). This means that in case the borrower defaults, the federal government will cover some part of this loan.

Qualifying for USDA Loans

The income limits for USDA loans vary by location and household size in that area. The USDA guaranteed home loans fund owner-occupied primary residences. The eligibility requirements of USDA loans are as follows:

  1. The borrower must be the US citizen or a permanent residence
  2. Monthly payments of the borrower cannot exceed 41% of their monthly income. The monthly payment of the loan is also restricted to 29% or less of the borrower’s monthly income. The monthly payment includes principal, insurance and taxes.
  3. The borrower must have an acceptable credit history. Applicants with a credit score of 640 or higher are directed towards the streamlined processing. Moreover, a score of 640 or higher also helps the eligible borrowers to secure a zero-down payment. However, credit scores below 640 must meet the underwriting requirements which are quite stringent.

If your credit score is low, you can still qualify for USDA loans however the interest rates might not be in the favor of the borrower. The fixed-interest rate USDA loans are based on the market value of the property at the mortgage approval or closing – whichever is lower. The interest rates can be as low as 1% depending on the circumstances of the borrowers. The payback period for USDA loan normally extends to 33 years but for very low-income borrowers it may extend up to 38 years.

The maximum amount of mortgage granted to the borrower depends on their ability to pay back.

How to apply for a guaranteed USDA loan?

The following documents must be gathered before applying for USDA loans.

  1. The borrower must show proof of US citizenship or permanent residency.
  2. The borrower must also show proof of the previous 2 years of pay stubs and tax returns.
  3. Credit score report
  4. Proof of non-citizen national
  5. Proof of other utility payments like rent and bill payments.
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