USDA home loans: all you need to know about rural development loans
When talk turns to buying a new home, the emphasis is often on the suburbs, small towns and the plentiful housing stock available in bustling urban areas, but with the help of a USDA home loan, you might find it easier to make your home in a more rural area. Rolling acres deep in the country, sparsely populated areas far away from the frenetic pace of modern life have their own unique charm.
The nation’s countryside has a durable appeal and plenty of admirers, and thanks to a program created by the federal government, its own specially designed home mortgage loans called rural development loans (from the United Stated Department of Agriculture). For qualified individuals, these loans can help facilitate the affordable and easy acquisition of clean, livable rural homes.
What is a USDA home loan?
In their mission to improve the quality of life in rural areas, the USDA is instrumental in extending loans to low- and moderate-income individuals and families to promote homeownership and foster individual and community prosperity. USDA loans are issued by the Rural Development Guaranteed Housing Program with the intention of providing home loans with zero down payment for qualified applicants. Generally, given the USDA loan guarantee, mortgage rates will be very competitively priced, but you’ll have to shop around and consult with participating USDA-approved lenders to ensure you’re getting the best deal. Credit scores and debt-to-income ratio will be factored in when determining interest rates.
In addition, as with many federal programs, there are other requirements of eligibility that must be met in order to qualify for a USDA loan, some of which we will discuss below.
USDA loan eligibility
USDA loans are designed to make it easier for lower-income rural inhabitants to achieve the dream of home ownership. There are actually a couple different types of USDA home loans, but at this time, the one we want to focus on is the USDA’s most popular offering: Single Family Home Loan Guarantees.
Key loan requirements for USDA mortgage eligibility are as follows:
- Location
- Residency and occupancy
- Income
- Debt-to-income (DTI) ratio
- Monthly mortgage payment
- Credit score
Rural development loans depend on location
But your rural development loan may not need to be as remote as you're thinking. The truth is, you don’t have to live in some isolated, deep country region of the nation to be eligible for a USDA home loan. Many areas identified as “suburban” readily qualify. In fact, in what may be a surprise to many, over 95% of the land in the U.S. is considered rural and therefore eligible for USDA designation. Simply visit the USDA Rural Development website and plug in your address to find out.
Residency and occupancy for USDA home loans
To qualify, you must be a U.S. residence or legal alien. You must also agree to make the dwelling your primary residence. Note: You do NOT have to be a first-time homebuyer to qualify for a USDA mortgage.
Income limits for USDA loans
This program is for individuals and families in economic need. As such, household income must not exceed 115% of median household income in your area. Similar to the online tool used for location eligibility, there’s an income eligibility page on the USDA Rural Development website to determine if you qualify. In addition, you do need to show consistent income over the past year, and two years if you’re self-employed.
USDA Loan Debt-to-income (DTI) ratio
Just like with a conventional mortgage, your DTI ratio plays a role in determining your rate. USDA-approved lenders generally like to see a total DTI of no more than 41% (although this can slightly vary from case to case).
Monthly mortgage payment
Most lenders will need you to demonstrate that your new USDA-backed mortgage payment will not eat up more than 29% of your monthly income. This includes the principal, interest and any related insurance and taxes.
Credit score
The USDA doesn’t require a specific credit score to be eligible for a home loan, but your lender might. Generally, for loans of this type, it’s important to have a score of 640 or better for streamlined processing.
If you meet the above criteria, then you may be eligible for a USDA home loan with no down payment requirement and zero reserves. These factors alone make it much easier for rural families to pull the trigger on a home purchase.
USDA Direct Loans
For those more financially challenged applicants, there is another loan available besides the Guaranteed Home Loans. They are called USDA Direct Loans, and are sometimes referred to by their technical name: Section 502 Direct Loans.
These loans are designed to assist low- and very low-income individuals who are seeking to purchase a home in a qualified rural or suburban area. The key difference between the Direct Loan and the Guaranteed Loan is that the former provides payment assistance to increase the homeowner’s repayment ability. In effect, this direct payment assistance is a type of subsidy that reduces the mortgage payment for a period of time. For a full rundown of eligibility considerations, applicants should go to the Rural Home Loan (Direct Program) online fact sheet.
Is a USDA home loan right for you?
USDA loans are not the only government-backed loans available to low- and moderate-income homebuyers. However, when compared to refinance or purchase a home in rural areas throughout the U.S.
*Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
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