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What Is a USDA Loan? Am I Eligible for One?

USDA loans are zero-down mortgages for homebuyers in remote areas. They're mostly for investors who aren't rich and are unable to get a conventional loan.

Perhaps being surrounded by pastures rather than streets makes you feel more at ease. If that's the case, thanks to the USDA's mortgage scheme, owning a house could be within reach. In reality, the USDA's mortgage assistance program could be one of the least well-known in the federal government.

A USDA home loan has no money down and is available to qualifying rural homebuyers. USDA loans are provided by the United States Department of Agriculture's USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program.

In 2017, the USDA's Rural Development initiative assisted 127,000 families in purchasing and upgrading their homes. The aim of the program is to "transform rural America's economy and quality of life." It has low interest rates and no down costs, and you might be shocked by how easy it is to get.

How do you know if a USDA loan is good for you because there are so many different kinds of mortgage loans to pick from? Here's a rundown on how it operates and who is eligible:

How USDA loan programs work

There are three USDA home loan programs:
  • Loan guarantees: Similar to FHA and VA-backed loans, the USDA guarantees a mortgage issued by a participating local lender, enabling you to get low mortgage interest rates even though you don't have a down payment. You would, however, be required to pay a mortgage insurance fee if you put little to no money down.
  • Direct loans: These USDA-backed mortgages are for middle- to extremely low-income borrowers. The income cutoffs differ by country. Interest rates as low as 1% are possible with subsidies.
  • Home improvement loans and grants: Homeowners may use these grants or outright cash awards to restore or update their properties. A loan and a grant will be included in a package to provide up to $27,500 in assistance.

Qualifying for a USDA-backed mortgage guarantee

The income requirements for a home loan guarantee differ by area and household size. Consult this USDA map and table to determine the loan guarantee income cap for your district.

Only owner-occupied primary homes are eligible for USDA secured home loans. Other criteria for qualifying include:
  • U.S. citizenship (or permanent residency)
  • A monthly payment — including principal, interest, insurance and taxes — that’s 29% or less of your monthly income. Other monthly interest contributions cannot exceed 41% of your gross income. If the credit score is over 680, the USDA would recommend higher debt ratios.
  • Dependable income, typically for a minimum of 24 months.
  • A good credit history is needed, as well as the absence of any accounts that have been transferred to collections in the previous 12 months. You can only apply if you can show that your credit was harmed by conditions that were temporary or outside your influence, such as a medical emergency.

Applicants with credit scores of 640 or higher would have their applications processed more quickly. You must follow more strict underwriting requirements below that. You can also apply if you have a credit background that isn't typical.

Applicants with credit scores of 640 or higher would have their applications processed more quickly. Those with lower scores would satisfy more strict underwriting requirements. Those who don't have a credit score or have a short credit history will apply using "nontraditional" credit sources including rental and service payment records.

How USDA-issued home loans work

The USDA goes a step forward in assisting homebuyers by issuing mortgages to those who are considered to have the highest need. This refers to an individual or a family who:
  • Is it possible to live without “decent, clean, and sanitary housing”?
  • Is unable to obtain a mortgage from a conventional lender
  • Has an adjusted wage equal to or less than the area's low-income cap

Direct loans are typically issued by the USDA for homes with a market value of less than the area loan cap and a square footage of less than 2,000 square feet. Again, depending on where you live, this is a moving goal. In expensive real estate markets like California and Hawaii, home loans can be as high as $500,000 or more, while in rural America, they can be as low as just over $100,000.

Eligible home locations

The USDA normally excludes metropolitan cities from its services, although there are pockets of opportunity in the suburbs. Rural areas are still included.

Next steps

Speak with a participating lender about applying for a USDA-backed loan. Ask your state's USDA office whether you're interested in a USDA direct mortgage, home renovation loan, or award.

While a USDA-sponsored initiative seems to be aimed at farmers and ranchers, your profession has little bearing on the certification process. It's just a matter of income and where you live to be eligible. No, you don't need to know the difference between sorghum and soybeans.