If you want to buy a home in a rural area but don’t have a high income, you might feel as if your choices are limited. Fortunately, you may qualify for a USDA home loan to get you feeling at home in the country. USDA mortgage are available in many rural parts of the country, and may be available with no money down. Continue reading to learn about USDA loan and requirements in 2024.
What Is A USDA Loan?
A USDA loan is a federally-guaranteed loan that certain mortgage lenders provide to certain low- and moderate-income buyers in specific rural areas. These loans are not just for first-time home buyers. The program usually offer a zero-down mortgage with flexible credit terms, and you don’t have to have a high income to qualify.
The USDA loan program has two options. The first is the USDA Guaranteed Loan that are offered through private lenders, credit unions, banks, and mortgage companies. The USDA backs part of the loan, so many lenders can offer the loan without requiring money down. The program is designed for people with low and moderate incomes that make no more than 115% of the median household income in the community.
The other option is the USDA Direct Loan. This program is made for people with low or very low incomes. It also may provide financial assistance to people with incomes that are at or below the local income limit. The loans are often issued directly by USDA and not regular lenders. To apply, you need to contact your local USDA state office.
USDA Direct Loans have some of the lowest mortgage rates on the market. After you factor in the payment assistance, you could have a rate as low as 1%!
Who Are USDA Home Loans Designed For?
The USDA loan program is offered by the Department of Agriculture as an incentive for low-income borrowers to purchase homes in eligible rural communities. The US government is attempting to help lower-income American families or individuals to purchase, refinance, or rehab a home in rural areas to fund their new home. The purpose also is to increase the population of rural communities and to open new businesses. USDA loans also are provided to increase land development, real estate improvements in rural areas, agriculture, and farming.
Studies show that rural communities are at an economic disadvantage compared to large cities. The USDA wants to reduce this bias by enhancing the quality of life for people in rural communities.
USDA loans can be used by first-time buyers, but people who have bought homes before can qualify, too. There is no required loan limit set the government; the borrower can apply for as high a loan as required to buy the home, if the lender approves.
How Do You Qualify For A USDA Home Loan in 2024?
The requirements for a USDA loan will vary somewhat by lender, but the USDA usually requires the following:
• You have to have an income within the local income limits for that community.
• The property must be used as your primary residence.
• You must buy a property in an area that the USDA deems rural.
• You must qualify for a mortgage payment that is not more than 29% of your gross monthly income.
You don’t have to have a minimum credit score to be approved for a USDA loan. But you have to show that you have the ability and willingness to handle your debt. You could run into a private lender that has higher eligibility requirements, such as having a minimum 580 credit score. If you cannot qualify for a particular USDA program, talk to one of our loan professionals today. We will do our best to get you qualified for a USDA loan.
Top 3 USDA Home Loan Programs in 2024:
USDA Loan Guarantees: The USDA backs mortgages from local lenders, enabling borrowers to qualify for low-interest rates without a down payment. Although borrowers avoid private mortgage insurance (PMI), they incur an upfront fee of 1% and an annual fee of 0.35% of the loan balance, distributed across monthly payments. This often proves more economical than traditional PMI.
USDA Direct Loans: Issued by the USDA, these mortgages cater to low- and very low-income individuals lacking secure housing or facing barriers to a conventional home loan. Income thresholds vary by region, and with subsidies, interest rates can drop to as low as 1%. These direct USDA loans offer terms extending up to 38 years. Typically, the USDA grants direct loans for homes valued below the area loan limit, which varies based on location. In certain regions like California and Hawaii, the limit can exceed $700,000, while most rural areas see USDA loan limits around $330,000.
USDA Home Improvement Loans and Grants: These financial solutions empower homeowners to repair or enhance their residences. Loan caps stand at $40,000, while grants max out at $10,000. Combination packages that include both a loan and a grant offer total assistance of up to $50,000. Loan terms range from 10 to 20 years, featuring a 1% USDA mortgage rate. If the homeowner sells the property within three years, any grant funds received must be repaid. This type of USDA loan program is similar to taking out a home equity loan.
What Is The USDA Loan Guarantee Fee?
To reduce the cost of the loan guarantee that USDA provides to lenders, the agency charges the lender a fee that can be passed on to the applicant. It is a one-time fee that is paid with closing costs and is a percentage of the mortgage amount. This is an ongoing legal fee that lasts for the entire life of the loan. The fee will be listed in your closing documents.
What Are The Pros And Cons Of USDA Loans?
There are many positives to USDA loans to think about. First, no down payment is usually required for a USDA mortgage. This is very helpful to first-time buyers and people with low incomes. Even if you only have a 5% down payment, that is $5,000 for a $100,000 loan, and $10,000 for a $200,000 loan. Imagine being able to get into your new home without a down payment! Home loans without a down payment are rare in 2024!
Second, you may qualify for payment assistance if you have a low income. This could help you through tight financial times. Third, you do not need a minimum credit score, so having a bad credit history will not necessarily prevent you from getting a loan.
There also are some downsides to USDA home loans to review. First, there is an upfront and annual guarantee fee. This fee protects the lender and USDA if you default on the loan. This will be charged to you every year for the life of the loan. It is similar in a way to mortgage insurance for conventional loans when the borrower has less than 20% equity. But with conventional loans, mortgage insurance is usually canceled once you have at least 20% equity. The USDA fee is never canceled as long as you have a mortgage.
You also have to buy a home in a USDA-designated area. While there are homes available in many parts of the country, you cannot buy a home in a major city or most suburban communities with a USDA home loan.
USDA Home Loan Requirements in 2024
The home you intend to buy with the USDA loan must pass safety and sanitary standards before it is purchased. The USDA can approve new construction and existing homes, if they are found to be safe and sanitary.
The home must be a single-family home and you must occupy it. This means you cannot use it as your secondary home, commercial property, or rental property. It cannot be used to improve your personal finances as an investor.
If there are amenities that are seen as income-producing funding, the home may be disqualified for a USDA loan. For example, if there is a fully functional bathroom, kitchen, and bedroom in the basement with a second entrance, this will not be approved by USDA. This could give the impression that part of the home will be rented out.
How Do You Prepare to Apply For a USDA Home Loan in 2024?
Getting approved for a USDA loan is often easier than conventional loans. However, there are several steps to follow to increase your chances of approval:
• Make sure that the property you want to buy is located in a rural community that is eligible for a USDA home loan. You can find out if the property is eligible by checking the USDA website.
• Ensure that you are eligible for the home by checking your income level and confirming with your loan advisor.
• Put together 60 days of bank statements and 30 days of pay stubs. Your lender will need to confirm your asset documentation and income documentation for all borrowers to assemble the loan.
• Your lender will also need your asset, debt, and personal finance documents for anyone over 18 who lives in the home.
• Have an up to date driver’s license and a copy of your social security card. You also can provide a passport to most lenders.
• If you have any recent large deposits into your bank account that are not from your job, be prepared to provide an explanation. The lender will look over your bank statements for sources of income to confirm you are eligible for the loan.
How do USDA and FHA loans differ?
Let’s distinguish between USDA and FHA home loans so you have a basic understanding of the differences. USDA loans impose more stringent income limits compared to FHA loan programs and mandate residency in an eligible rural area. Eligibility for USDA loans is determined by your home address and annual household income. FHA mortgages, on the contrary, have more flexible borrower requirements, allowing for lower credit scores.
USDA Home Loan Highlights
A USDA loan is an excellent opportunity for home buyers who want to purchase a primary residence in a rural community. Our loan advisors can help you to understand the USDA loan requirements for various types of property. We are a USDA-approved lender and can help you select a loan that is best for your circumstances.
Our loan advisor team also can offer you a home affordability calculator so you can understand all of the expenses when the loan closes. We also will help you find the best choice for financing closing costs, if you like. For example, your loan closing costs could be financed into the loan, or could be paid with an assistance or grant program.
If it turns out that the USDA loan isn’t the best fit, our loan professionals can offer other options, such as an FHA loan with a 3.5% down payment. For more information, speak to one of our loan professionals today! We can help you get into the home of your dreams!