What is a USDA home loan and how do you qualify for it?
Q: We are looking to get out of town and have found a nice older house further out of the suburbs than expected. We’ve been paying high rent with low incomes for so long that we haven’t been able to save any money, and a local mortgage lender who turned down our request suggested we apply for a USDA home loan, but we don’t know this. that this means. What is a USDA home loan?
A: A USDA Home Loan may be a great option for you! The program is designed to help moderate to low income buyers obtain affordable home loans to buy or improve homes in rural areas. For years, most Americans lived in the countryside on farms and fields. The industrial age brought people to cities, but eventually people started to tire of sidewalks and high rise buildings and spread to the suburbs. The proximity of the suburbs to the employment centers in the cities made life more expensive, so many people who wished they had owned property found them to be overpriced and stuck in the cities. At the same time, the United States Department of Agriculture (USDA) has become increasingly concerned about the lagging economy and small population in rural farming areas further from cities. Realizing that it could solve two problems with one program, USDA began offering low-interest, no-down mortgages and home improvement loans to buyers who met certain conditions and were ready. to settle in rural areas. Here’s what you need to know about USDA home loan eligibility.
A USDA home loan is a government-guaranteed loan that provides middle- and low-income U.S. citizens with the opportunity to own a home in designated rural areas.
Mortgage rates offered by traditional lenders are based on the lender’s perception of the borrower’s ability to repay the loan and interest and the amount of the down payment. Unfortunately, many low and moderate income borrowers cannot afford to pay their monthly bills and also save for a down payment. Low-income borrowers are also less likely to have sufficiently high credit scores, either because they haven’t built a credit history over time or because financial hardship has left negative things in their minds. their file. USDA mortgage removes these barriers for borrowers wishing to buy a home in certain rural communities in an effort to help more people build wealth through homeownership, repopulate rural areas and relocate. stimulate the economy.
A USDA home loan is a no-down loan, usually with low interest rates and long repayment periods.
The down payment and high interest rates are often the biggest hurdles for low-income buyers. Rent, utilities, transportation, and insurance costs (plus food and medical costs) can quickly eat away at a paycheck, leaving little or no additional savings. While these borrowers may be perfectly capable of paying their mortgage each month – after all, they are successfully paying their rent – they cannot save the thousands of dollars needed for a substantial down payment. Even if they are able to raise a small down payment, the small down payment can result in exorbitant interest rates to protect the interests of the lender in the event the borrower defaults. USDA guarantees loans issued under this program, so lenders can offer loans with no down payment and low interest rates. Plus, lenders can extend the repayment period more than they can for a conventional loan – 33 to 38 years, instead of the traditional 30 years – making monthly payments smaller and easier to manage for borrowers. .
There are three types of USDA home loan programs: loan guarantees, direct loans, and home improvement loans.
The USDA loan program offers several options for low-income borrowers to buy or improve their homes. The first route is through secured loans: local lenders choose to participate in the program and agree to abide by USDA lending regulations, and in return USDA guarantees the loan (if the borrower defaults the USDA will cover the financial losses of the lender, so the lender is at less risk). In this way, the borrower can work with a local bank and develop a relationship with a creditor that will create community and support local businesses while providing a service to the borrower. In cases where this is not an option, such as borrowers with income below the threshold set by most local lenders, the USDA will issue the loan itself. The parameters and income requirements for these loans vary by region, but they also tend to have extremely low interest rates. Finally, the USDA offers loans and grants to help borrowers modernize or repair their homes; a combination of grants and a USDA construction loan provides up to $ 27,500 in assistance to help borrowers improve the value and condition of their homes.
USDA loans differ from conventional loans in several ways, such as down payment requirements.
USDA loans don’t have a down payment requirement, but this is really just the first of the many ways USDA loans benefit borrowers. Those with a questionable credit history (there is no set minimum credit score) or non-traditional credit references can still apply and be approved. The origination fees and rates are also lower than for traditional loans. However, USDA loans are limited to homes located in rural (or sometimes underserved suburban) areas, so borrowers cannot choose a home where they want. The USDA also reserves the right to limit the size and function of the purchased home. While the loan should be for a safe and sound home, it cannot exceed 2,000 square feet, must have a market value below the local market value, and cannot have a pool or be used for income-generating activities. . This is to ensure that the communities and properties most in need of the stimulation provided by the program will be on the front lines. Finally, USDA loans may take a little longer to close. Borrowers with higher credit scores can see closings in as little as 3 weeks, but those with unconventional credit histories or whose eligibility requires further verification may take up to 60 days to close.
Applicants must meet certain requirements, such as not exceeding predetermined income limits.
Applicants themselves must also meet certain eligibility criteria. Buyers need to be able to verify that they do not have safe, hygienic and decent housing and that they cannot get a loan that they can manage from other lenders. The property that borrowers buy must be their primary home: USDA loan requirements prevent the funds from being used for secondary or rental properties, and they require a home to be present on the property because they don’t. not offer land loans. USDA has determined income limits based on regional average incomes, and the borrower’s income and assets cannot exceed this limit. These limits vary because house prices cover such a wide range across the country; a low-income borrower in California may have a higher income than a wealthy homeowner in an area where house prices are lower. Check your area for income limits. In addition, the borrower must be a citizen of the United States.
Only participating lenders can issue USDA loans.
The USDA home loan program is tightly regulated to allow the department to help those who need it most. As a result, the number of banks and mortgage lenders who can offer USDA loans is limited to those who are committed to fully meeting the loan and service requirements demanded by the program. The pool of participating lenders is also small so that the USDA can carefully monitor the loan and repayment process. Some lenders prefer not to go through the extra paperwork and oversight, while others are unwilling to take the risk of lending money to borrowers with low income or even having credit problems. with government support. You may need to call local lenders you would like to work with, or check the USDA eligibility page for contact details for participating lenders in your area or online.