USDA Home Loans are a viable alternative for financing the purchase of a residential property, especially for first-time buyers. USDA is an acronym that means United States Department of Agriculture. In the past, these loans were used primarily to help finance the acquisition of properties in rural areas. However, in recent years, the program has expanded to include the purchase of homes in most areas of the country that are outside of major metropolitan areas
Types of USDA Home Loans
The USDA offers two types of loans for the purchase of single-family properties: guaranteed rural housing loans and direct rural housing loans. Guaranteed loans are the most common type of USDA loans. They have higher income limits as they allow applicants to have an income of up to 115% of the area's median household income. For a family of up to four people, the income limit is $74,050 and for a family of eight, the limit is $97,950. These loans have a 30-year term at a fixed rate.
Direct loans are available only for low-income applicants. USDA guidelines for these loans define very low income as less than 50% of the area's median household income, while low income is defined as 50–80%. To obtain these loans, borrowers must directly contact a local USDA office.
No Down Payment Required
The biggest benefit of the USDA Home Loan program is that applicants can finance a property without a down payment. For many people, that can mean the difference between owning their own property or continuing to rent. Closing costs may also be incorporated into the loan amount, which is another plus.
The main requirement is that your monthly housing costs, which equal the amount of your mortgage principal and interest, property taxes and insurance, cannot be more than 29% of your household income. You also need enough income to pay other monthly debts along with a 600 FICO score.
USDA Home Loan borrowers enjoy a number of other advantages. These include:
Below-market interest rates: These rates do not vary based on credit ratings or the absence of a down payment.
Lower private mortgage insurance rates: These are required for mortgages where the financing is more than 80% of the total purchase price.
Flexible credit: This is necessary as USDA borrowers can often qualify with lower FICO scores.
Ability to roll initial private mortgage insurance into the loan: This can also increase the likelihood of approval.
Rural properties that meet USDA loan requirements are located in areas with a population of 10,000 or less. Some small cities may also qualify. You'll also face no maximum loan amounts for this type of loan, which is an additional reason why a USDA loan is a viable alternative form of mortgage financing.