What Is A USDA Loan? A Guide For Home Buyers

What Is A USDA Loan? A Guide For Home Buyers

What Is A USDA Loan? A USDA loan is one of the least utilized types of loans available. If you are a home buyer shopping for a loan, it's important to know what a USDA loan is and whether or not you would qualify. Once you know about the USDA loan system, you can decide for yourself whether or not this loan is right for you.

What Is A USDA Loan?

A USDA loan is a loan issued through the US Department of Agriculture. For most qualifying borrowers, USDA loans work like FHA loans. Like FHA loans, borrowers obtain the loan by finding a lender who has been pre-approved by USDA. Also like FHA loans, home buyers who put no money or very little money down must pay mortgage insurance on the life of the loan.

USDA issues these loans to help improve quality of life in rural United States. USDA also grants loans to homeowners who need to repair or improve their homes. For very low income home buyers, direct loans from USDA are a available at a very low interest rate. Although interest rates vary by region, USDA loans can have interest rates as low as 1 percent.

Who qualifies for a USDA home loan?

Buyers who qualify for a loan must meet a variety of criteria established by the USDA. This criteria includes:

  • The buyer must be a U.S. citizen.
  • The buyer must be employed and have dependable income for at least two years.
  • The monthly payment for the loan, including all fees and insurances, must be less than 30 percent of the buyer's monthly income.
  • The buyer cannot have debt payments in excess of 41 percent of his or her monthly income. Borrowers who have a credit score over 660 may have a little leeway on this.
  • The buyer's credit history must include no collections on debts within the last 12 months.

While USDA loans are intended to help buyers from low-income households, those who have higher credit scores (over 620) will have streamlined underwriting and processing. Borrowers with low credit scores (below 580) will face stricter underwriting requirements.

How does a USDA loan compare to other loans?

USDA loans differ from FHA loans and conventional loans in that they require no down payment. FHA loans require a downpayment of 3.5 percent. Conventional loans can be obtained with a down payment as low as 3 percent, but with higher down payments, borrowers may not need to pay for mortgage insurance.

Unlike conventional and FHA loans, USDA loans are intended for home buyers and homeowners in rural communities. However, the USDA is liberal with its definition of a rural area and many small towns and suburban areas, like Morningside qualify as well.

Unlike FHA and conventional loans, USDA loans are typically administered to homes with a market value below the loan limit for the area. Loans may vary anywhere from $100,000 to $500,000, depending on where the borrower intends to buy.

What are the first steps to take for borrowers who would like a USDA loan?

Borrowers can get started by contacting a lender who participates in the USDA program. If the borrower qualifies for a loan made directly by USDA, the borrower can get started by contacting the nearest USDA office. First steps involve contacting the lender, determining what paperwork must be completed in order to start the loan process and submitting an application.

For more information about the USDA loan program, contact your lender or USDA office today. Buyers who already have a real estate agent can also contact their real estate agent with questions about homes in USDA zones.

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