USDA Loans
Urban living isn’t for everyone. You can make country roads your home with USDA loans. Because the USDA has a mandate to provide opportunities for affordable homeownership in rural areas, these loans are a good choice for new households, people with credit challenges, and first-time homebuyers (but that’s not a requirement).
Many small towns and suburban areas fall within the USDA eligibility areas, too, so it’s worth exploring a USDA rural development loan if you don’t want to be too far out in the country.
What is a USDA loan?
A USDA loan is a government-backed, no down payment home loan that allows low- to moderate-income households to get up to 100% financing for their primary residence. Whether you’re looking to buy, build, repair, or renovate, 91% of the United States is within the USDA mortgage boundary, so your opportunities are wide open!
How does a USDA rural development loan work?
Because the USDA rural housing loan program is designed to help people in eligible rural areas become homeowners, there are borrower participation requirements, including:
- Meeting income eligibility standards
- Occupying the home as your primary residence
- Being a U.S. Citizen, U.S. non-citizen national, or Qualified Alien
In addition, the property must be located in a USDA-defined eligible rural area and meet USDA eligibility requirements. You may be surprised to find out that there are small towns and even some areas close to cities that qualify.
History of USDA home loans
In the early 20th century, very few rural homes in the United States had indoor plumbing or electricity, and poverty was at an all-time high.
The Housing Act of 1949 declared that every American deserves a “decent home and a suitable living environment.” Housing in a post-World War II era was in short supply, and many cities had houses that were in rapidly deteriorating condition. To meet the goal of better and more abundant housing, the Housing Act set the framework for the creation of the USDA home loan program.
What are the benefits of USDA home loans?
A USDA rural home loan from CrossCountry Mortgage provides several benefits:
- You may qualify for up to 100% financing (the loan amount may not exceed 100% of the home’s appraised value)
- No down payment required
- A fixed-rate 30-year mortgage keeps your monthly principal and interest payments consistent throughout the loan term
- If mortgage rates drop, you can refinance with a USDA rural streamline refinance loan.
- Closing costs can be paid by the seller (up to 6% of the sale price) or included in the loan (if the appraised value is sufficient to provide the additional funds)
- The program is not limited to first-time homebuyers
- There is no maximum purchase price, though qualifying ratios and income will determine eligibility
- Certain home repairs and improvements may be included in the loan
- You can finance any of the following:
- Existing home
- New construction
- Modular home
- Planned unit development (PUD)
- Eligible condominium
- New manufactured home
Eligibility requirements
To qualify for a USDA rural home loan, you must meet certain requirements, including:
- Income of all adult household members cannot exceed 115% of the median income for the area where you are buying
- Current housing is not adequate or no longer meets your needs, and you can afford the mortgage payments, including insurance and taxes
- Cannot obtain a conventional loan
- Credit history demonstrates willingness to repay the loan and there are no current delinquencies on non-tax Federal Debt
USDA loan FAQs
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Pre-qualification is the first step that aspiring rural homebuyers must take toward obtaining USDA financing for the home of their dreams.
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To determine eligibility for a USDA mortgage, a loan officer will examine your financial and credit background. Your household income cannot be more than 115% of the median for the property location.
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In this initial stage, a loan officer will only ask for basic information and rough estimates of your financial status. Some specific information that you can expect to disclose during pre-qualification includes: your approximate credit score, your current income, price range of the home you would like to purchase, current debts, and any assets. Disclosing this information will provide a loan officer with a better view of your financial status, and it will help you identify any potential roadblocks that could prevent you from securing a USDA rural housing loan.
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As with any mortgage loan, you must display the ability and willingness to repay a USDA home loan in monthly installments. Your credit background will be analyzed to determine your ability to meet the repayment obligations as they become due. It’s also important that you show steady and sufficient income, as well as reserve income. An accurate view of your available income will help determine your ability to meet your monthly USDA mortgage payments.
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Receiving your pre-approval letter is an in-depth process, and includes a review of your paystubs, tax returns, W-2s, employment history, bank statements, and other assets. The paperwork may seem like a lot in this stage of the USDA loan process, but sellers are much more likely to take your offer seriously once they know you are approved and have received your pre-approval letter.
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Your pre-approval letter does not necessarily mean that you will qualify for USDA financing. You may have to meet certain requirements to receive your loan, such as restricting the purchase of big-ticket items and not taking on any new debts.
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Let your real estate agent know you’re using USDA financing as soon as possible. If you want to ask the seller to contribute to the closing costs, your agent will want to make that part of your purchase offer. You will also need to look for homes within USDA-approved areas.
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If you aren’t able to negotiate the closing costs into your offer, and you cannot pay them yourself, gift funds are allowed from family or close friends. However, you’ll need a gift letter as part of your application.
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A home inspection is not required, but will give you a full report on the property’s condition, including any safety issues or repairs needed. A home appraisal is required to document the property’s value.
