The United States Department of Agriculture (USDA) offers a loan program that caters to Americans who are looking to own a home in rural areas. The USDA loan is a valuable resource for those who want to achieve the American dream of homeownership but lack the funds for a down payment or don’t qualify for traditional loans. Although the USDA loan is designed for rural Americans, many people who reside in suburban areas and some cities may also qualify for the loan.
What is a USDA Loan?
A USDA loan is a mortgage offered by the USDA Rural Development Guaranteed Housing Loan Program. The loan is provided to low- to moderate-income individuals and families who want to purchase a home in rural areas. In some cases, the loan may also be available for suburban areas and small cities with populations of up to 35,000.
The USDA loan comes with a few significant benefits, including:
1. Zero Down Payment
For many Americans, the high cost of a down payment is a significant obstacle to homeownership. The good news is that the USDA loan requires no down payment, making it an appealing option for low-income families and first-time homebuyers.
2. Low-Interest Rate
Another advantage of the USDA loan is the low-interest rate. This makes it a more affordable option for those who struggle with high housing costs in rural areas.
3. No Private Mortgage Insurance
The USDA loan doesn’t require private mortgage insurance (PMI), which is often required for conventional loans in cases where the borrower is unable to put down a significant down payment.
Who Can Qualify for a USDA Loan?
To qualify for a USDA loan, an individual must meet the following criteria:
1. Income Limit
The USDA loan is designed for low- and moderate-income families. While there is no set income limit, the household income must be no more than 115% of the median household income in the applicant’s area. The applicant’s credit history and their ability to repay the loan are also considered.
2. Eligible Locations
The USDA loan is specifically designed for rural areas. The USDA has a map on its website that shows eligible locations that fall under rural or suburban categories. The location of the property also must be owner-occupied, and the applicant cannot be using the property for any commercial purpose.
3. Credit History
Like all loans, the USDA loan applicant must have a satisfactory credit history. The USDA requires a minimum credit score of 640. If an applicant has a lower score, it may still be possible to qualify, but other factors will be taken into account, such as their debt-to-income ratio.
The USDA Loan Process
The USDA loan process is like any other mortgage, but it takes a bit more time due to the complexity of the program. It is essential to have a clear idea of the process before applying for the USDA loan, so here are the basic steps to successfully get a USDA Loan:
Step 1: Apply for Pre-Approval
The initial step to secure a USDA loan is to get pre-approved. This process is important as it provides the applicants a clear understanding of the amount they can afford to borrow, and it also makes the process of finding a home easier.
Step 2: Search for an Eligible Property
The USDA loan only applies to eligible properties. Therefore, once the applicant has gone through the pre-approval process, they can start searching for an eligible property. For suburban and urban areas, property eligibility maps are used to determine if the location is eligible for the loan. Once the applicant has found an eligible property, they should schedule an inspection to ensure the property meets the basic requirements of a safe and livable home.
Step 3: Loan Processing
Once the applicant finds the property of their choice, they must submit their loan application to the USDA lender. The lender will process the application and determine whether the applicant meets the qualifications.
Step 4: Closing
The final step of the loan process is the closing. At this point, the lender will set the date and time of the closing. It is important that the applicant reads through all the documents provided and only sign when they fully understand and agree with the terms.
Is a USDA loan right for you?
While the USDA loan may be a bit more challenging to secure, it is a valuable resource for those who want to own a home in rural or semi-rural areas. The loan comes with a plethora of benefits such as zero down payment, lower interest rate, and no private mortgage insurance. If you are considering homeownership in rural or suburban areas and you meet the eligibility criteria for the USDA loan, it is worth exploring the option to see if it is the right fit for you.
