The Basics of the USDA Loan

Do you seem more comfortable surrounded by pastures than pavement? If so, buying a home in a rural setting might be well within reach, thanks to the U.S. Department of Agriculture mortgage program. In fact, the USDA has one of the government’s least-known mortgage assistance programs.

Issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture, a USDA home loan is a zero-down payment mortgage for eligible rural and suburban homebuyers. It’s a great option for first-time home buyers who do not have funds for a down payment.

The USDA invested almost $20 billion in 2014 to assist people purchase and improve their homes, as part of its Rural Development program. Designed to “improve the economy and quality of life in rural America,” this program offers low interest rates and no down payments — and, you may be surprised to find just how accessible it is.

How to Qualify

The basics for qualifying are equal other loan programs regarding basic requirements; credit score, length of employment required is a two-year history with no longer than a 30-day gap between jobs, and a two-year period after a bankruptcy has been discharged. The property must be a single family, stick built, move-in-ready home; no manufactured homes.

The property also must be located in a rural development territory as designated by the USDA guidelines which generally consists of properties not located within city, metropolitan areas, or suburbs — but in rural country areas with smaller populations. This does vary by county and state, and each has its own designated areas.

Another factor purchasers need to meet is income. USDA caps maximum income per household which also varies per county, per state, per number of members in the household. When calculating income, all household members’ income must be accounted for, no matter whether their names are on the loan or not. The more members in household the higher the limits go.

The most significant perk to meeting the requirements of the loan is the 100% financing option with the monthly mortgage insurance fee being significantly less than other government programs — which helps keep the monthly payment lower.

The Three USDA home loan programs:

Loan guarantees: The USDA guarantees a mortgage issued by a participating local lender — similar to FHA and VA-backed loans — allowing you to get low mortgage rates, even without a down payment. If you put little or no money down, as with traditional mortgages, you will have to pay a mortgage insurance premium along with your mortgage payment.

Direct loans: Issued by the USDA, these mortgages are for low and very low-income applicants. Income thresholds vary by region. With qualifying subsidies, interest rates can be as low as 1%.

Home improvement loans and grants: These loans or outright financial awards allow homeowners to repair or upgrade their homes. Packages can also combine a loan and a grant, providing up to $27,500 in assistance.

Qualifying for a USDA-backed mortgage guarantee: Income limits to qualify for a home loan guarantee vary and depend on your household size. To find the loan guarantee income limit for the county where you live, consult a USDA map. USDA guaranteed home loans are only for owner-occupied primary residences.

Other Eligibility Requirements Include:

  • U.S. citizenship
  • A monthly payment inclusive of principal, interest, insurance, and taxes that’s 29% or less of your monthly income. Other monthly debt payments you make cannot exceed 41% of your income. However, the USDA will consider higher debt ratios if you have a credit score above 660.
  • Dependable income, showing proof of a minimum 24-month period.
  • An acceptable credit history, with no accounts in collections within the last 12 months, among other criteria. If you can prove that your credit was affected by circumstances that were temporary or outside of your control, including a medical emergency, you may still qualify. Applicants with credit scores of 620 or higher usually receive streamlined processing. Those with scores below 580 must meet more stringent underwriting standards. And those without a credit score can qualify with nontraditional credit references, such as significant rental and utility payment histories.

How USDA-Issued Home Loans Work

Truly designed to assist people purchase a home, the USDA issues mortgages to applicants deemed to have the greatest need. That means an individual or family that:

  • Is without “decent, safe and sanitary housing”
  • Is unable to secure a home loan from traditional sources
  • Has an adjusted income at or below the low-income limit for the area where they reside

The USDA usually issues direct loans for homes of 1,800 square feet or less, with a market value below the area loan limit. Home loans can be as high as $500,000 or more in costly real estate markets like California and Hawaii, and as low as $100,000 in parts of rural America. A loan of $200,000 is typical in many areas of the country.

Metropolitan areas are generally excluded from USDA programs, but pockets of available properties exist in some suburbs. Rural locations are always eligible.

Next Steps

To apply for a USDA-backed loan, talk to a participating lender. If you’re interested in a USDA direct mortgage or home improvement loan or grant, contact your state’s USDA office.

A program sponsored by the USDA might seem to be targeted to farmers and ranchers, but your occupation has nothing to do with the qualification process. Eligibility is simply a matter of income and location.

Golden State Mortgage Can Help

At Golden State Mortgage, we are a California based mortgage company, and specialize in FHA home loans for first time home buyers. FHA loans are a great option for first time home buyers and if this is your first home purchase then a California FHA home loans are probably your best option due to the low down payment and easier credit standards. Your down payment can be as low as 3.5% of the purchase price, and closing costs and fees can be covered by the seller. Call Golden State Mortgage today at 1-888-502-2136 or fill out the quick contact form to speak with a California FHA loan consultant and get a free good faith estimate.