If you have a low to moderate income and want to buy a house in a rural area, consider getting a USDA loan. There are several types of USDA loan programs. Each of them is designed to help people who do not qualify for other types of home loans to buy, build, or renovate homes in rural areas.
While eligibility isn’t limited to first-time homebuyers, these loans can be very useful if it’s your first time off as USDA loans usually don’t require a down payment.
USDA loans can be used to buy or repair eligible homes in rural areas. They are aimed at those who earn below a certain threshold who cannot find other loans at affordable rates.
We’ll take a look at the different types of USDA loans and their eligibility requirements. We will also compare USDA loans to FHA loans and review some questions to consider before applying for a USDA loan.
Are you looking for a home loan?
How do USDA loans work?
The US Department of Agriculture offers three types of loan programs for those looking to buy or renovate single-family homes in rural areas.
These programs are designed to help people who cannot afford to buy houses or continue to live in existing ones. The USDA also has a broader goal of promoting population welfare and strengthening rural economies.
Each type of loan works a little differently.
Section 502 Direct Loans
The USDA lends money directly to homebuyers through its direct single-family home loan program (also known as direct home loans in Section 502). Some people borrowing directly from the USDA are also entitled to repayment assistance, which temporarily reduces the monthly payment they have to pay.
If you qualify, you can use this loan to buy an existing home and even repair it if necessary. You can also use the money to build a new house.
You don’t need to make an initial payment unless your assets are above a certain threshold. Another plus: You don’t have to pay for mortgage insurance.
Loans have a fixed interest rate which is determined by market interest rates. If you qualify for payment assistance, the effective rate can be up to 1%. The loan term is usually 33 years, although very low-income borrowers can have up to 38 years to pay off the loan.
Loan sizes are based on income, assets, debt ratios, and other financial details, but must not exceed the USDA borrowing limit for the area. And this type of loan cannot be used to buy or build an extraordinarily large or valuable home for its location, own an indoor pool, or serve as a business location or generate income.
The USDA guarantees some loans offered by private lenders through its Single-Family Housing Guaranteed Loan Program (Section 502 guaranteed loans). These loans can be used to buy an existing home, as well as cover the costs of repairing or improving it. They can also be used to build a new home or to refinance another USDA-guaranteed loan or Section 502 direct loan that the homeowner previously took out.
USDA-guaranteed loans don’t require a down payment. And while you don’t have to pay for mortgage insurance, these loans come with a yearly “guarantee” fee that’s worked into your monthly payments.
USDA-guaranteed loans can be as much as 100% of the appraised value of the home. If the sale price is less than that, the homebuyer can use the difference to cover repairs or pay closing costs, the costs of setting up utilities, or some other expenses related to the purchase.
The participating private lenders determine what interest rates to offer, but they have to stick to fixed-rate loans with 30-year terms.
To be eligible, a home needs to be a single-family dwelling (which can include a house, condo, or modular or manufactured structure) that meets standards set by the Department of Housing and Urban Development. And it can’t be on a lot that’s particularly large for where it’s located.
USDA housing repair loans
Loans offered through the Section 504 Home Repair program are meant to provide funds to bring homes up to date, make needed repairs, or eliminate health hazards and safety risks. For example, loans may be used to fix structural issues or to connect a home with a water or sewer line.
These loans also may be used to install or fix a heating system, put in a new roof, or insulate the home so it can be lived in comfortably during the winter.
Loans amounts can’t be more than $20,000, and borrowers have 20 years to pay the loan back. The interest rate stays at 1% for the life of the loan. The program also makes grants available for the same use for eligible people who are at least 62 years old and can’t afford to repay a loan.
Who qualifies for a USDA loan?
To get a USDA loan, the home you want to buy or repair must be in an eligible area. Homes usually need to be located in an area where the population is below 20,000, though in some cases homes in areas with a population as high as 35,000 are eligible.
Other requirements vary depending on the type of loan you’re applying for.
1.Section 502 direct loans
Applicants need to have income no higher than the USDA’s low-income limit for the county where they’re buying or building a home. They also have to be able to show that they can pay back the loan.
They must plan to use the property as their primary residence, and they can’t already have other housing lined up or have the option to take out a reasonably good loan from a different source.
Applicants need to have a household income that isn’t more than 115% of the median income. They have to show that they can repay a loan, but it’s OK if they have alternative proof of credit history in place of conventional credit reports and scores.
They need to plan to use the property as their primary residence, and they must be unable to get a no-PMI (private mortgage insurance) conventional loan.
3.USDA housing repair loans
Applicants need to own the home and are living in it. Their income has to be less than 50% of the median income for their county, and they must not be able to find a loan they can afford from another source.
Is a USDA loan or an FHA loan better?
USDA loans and FHA loans have their advantages and disadvantages. Which one is better for you depends on your circumstances.
USDA loans can be cheaper than FHA loans. Therefore, it’s best if you consider a USDA loan first if you qualify. USDA loans usually don’t require a down payment, which makes them attractive to homebuyers who don’t save a lot of money. In contrast, for FHA loans, a down payment of 3.5% or more is required.
USDA direct loans don’t require you to pay for mortgage insurance, while FHA loans require monthly mortgage insurance as well as a one-time mortgage insurance premium upfront.
However, FHA loans do not have an income cap like USDA loans, so they are available to people with a wider income range. And you can use an FHA loan to buy an eligible home anywhere in the US, unlike USDA loans, which are specifically restricted to rural areas that meet population thresholds.
You are not excluded from the geographic location with an FHA loan, although the maximum amount you can borrow varies from state to state.
Here are some questions to ask before applying for a USDA home loan.
Are the properties you are interested in in a suitable area? Search for a USDA card to make sure that the address is eligible for a loan.
Are you entitled to a grant instead of or in connection with a loan? Homeowners who are 62 years or older and do not have the funds to repay the repair loan are eligible for USDA repair grants. Grants can go up to $ 7,500 and are only used to eliminate a health or safety risk.
Can You Get Affordable Finance From Traditional Lenders? USDA loans are only available for people who cannot find other acceptable loans. You can request quotes from several lenders to ensure that traditional loans are not available to you.