What Is A USDA Home Loan?

July 17, 2019 9:00 am What Is A USDA Home Loan Published by

In 1949, Congress signed a new housing act into law. In an attempt to aid struggling farmers and other impoverished rural people, a program was created whereby rural people (particularly farmers and their tenants) could borrow the money needed to improve their farms, purchase new land and equipment, and enjoy a decent standard of living. The housing act of 1949 also gave the USDA the ability to disburse grants for those who needed a little bit of extra help.

Since then, many people have found the USDA home loan program to be helpful. Both farmers and impoverished rural residents can use this program to get on their feet. In this article, we will teach you a little bit more about USDA loans.

What Is A USDA Loan?

As you may already know, USDA loans are part of a government program overseen by the United States Department Of Agriculture. These loans are classified as mortgages and work in much the same way as any other. However, these loans are specifically intended for rural farmers. As such, the rules are set up with that kind of borrower in mind.

Because this program is intended to help people, there is usually no down payment. As with any government-backed mortgage, the terms of the loan will mostly depend on your lender. These loans are used not only to buy existing homes but also to finance the construction of new homes. USDA loans can also be used to cover essential repairs to your home, especially if the damage presents a safety hazard.

Because USDA loans are primarily intended to help impoverished people to build or buy homes, these loans have maximum income limits. Any household whose income is greater than the limit will be ineligible. Bear in mind that they will be looking at your total household income, not just the income of the borrower.

The Different Types Of USDA Loans

There are four basic types of USDA loan. Let’s take a look at them one by one.

  • Guaranteed Loan: This is called a “guaranteed loan” because these loans are backed by the federal government. Thus, if you go into default, the USDA will have to repay 90% of your debt. This isn’t a good thing for you because of the massive levels of interest that will be incurred. However, it’s a great thing for your lender. Interest rate subsidies are not available for a guaranteed loan. There is no restriction as to the size of your home when you choose this option.
  • Direct Loan: The maximum income requirement for this type of loan is a little steep, but its terms are even more generous. Instead of getting the money from a lender, the borrower is paid directly by the USDA. The money can be used to purchase, build, or repair a home. In order to qualify for a direct loan, your income will need to be a little lower. If your income is more than 80% of the median home value for your area, you will not be approved. Interest rate subsidies are also available. However, you might be a little more restricted in terms of home size. There is also a requirement that a borrower should be unable to obtain credit through normal means. No such requirement exists for the other kinds of USDA loans.
  • Rural Repair Loan: This program is meant for very low-income borrowers. As the name implies, these loans are primarily intended for the repair and maintenance of an existing home. The program will provide funds up to %20,000, and can disburse grants of up to $7,500. This loan program is probably the most generous of the three because of the fact that it is harder to obtain. Your income must be 50% of the median level or less. The program always prioritizes instances in which human life or safety is threatened, so bear that in mind as well.
  • Construction-To-Permanent Loan: This program is meant for those who have chosen to build a new home. It is essentially two loans in one, with one part covering the construction costs and the other covering the price of the home itself. These loans only cover single-family homes, but they will cover everything needed for such homes, including the lot, material costs, and even landscaping. Leftover construction funds can be returned with no penalty so that the principal does not increase. These loans have a fixed interest rate

Who Qualifies For a USDA Loan?

If you want to skip this section, you can just use this handy eligibility calculator to clear things up. You can also check this page from the USDA’s website. You will need to give them complete and accurate information in order to obtain a realistic total. There are several important requirements that must be met in order to get this kind of loan.

Income Requirements

First, you need to make sure that your income isn’t too high. Once again, this program was created to help low-income people. If you aren’t one, you should probably look elsewhere for your funding. You also have to be purchasing a home in an eligible area. In practice, just about anywhere outside of city limits is considered to be rural and thus eligible to apply. As per current regulations, USDA borrowers can have an income that is 80-115% of the median income for their area. If they make any more money than this, they will not qualify for a USDA loan. Within this accepted range of 80-115%, the exact requirements will depend on which kind of USDA loan you want.

If you are trying to get a direct loan, the vetting process will probably be a little more involved. This program is intended only for those who truly need it, so they will take a very dim view if you are found to have misrepresented even the smallest detail. You will need to show that you are not able to obtain a loan through any standard means.

If you are trying to get a housing repair loan, the requirements are even more strict. Your income must be 50% of the median income for your area. As you can see, those loans are intended for the impoverished and the elderly.

Credit And Work History Requirements

There are some credit requirements. To get this kind of a loan, you will probably need a credit score of at least 640. Although that isn’t a very high standard, it is high enough to weed out those who are never likely to pay. Bear in mind that these credit score requirements do not come from the USDA. Each USDA-approved lender sets its requirements as they see fit, so 640 is just a ballpark figure.

Although USDA loans are intended for those without a lot of money, they are not intended for those who are broke. You have to show both the government and the lender (if applicable) that you have enough income to pay all relevant debts. You will also need to make sure that you have been steadily employed for at least the last two years. Any major gaps in employment will be looked down upon quite strongly, as it suggests a lazy person who doesn’t work unless they are forced to do so. Would you loan money to a person like that?

Special Considerations For Construction Loans

If you are getting a construction-to-permanent loan, the lender will also want to evaluate your chosen builder. They must have at least two years of construction experience, they must be licensed and insured, they must meet a credit minimum, and they must have no criminal history.

Speaking of construction loans, you need to be aware that the terms of the loan will change somewhat once construction is complete. As we said earlier, this kind of loan is basically two loans in one, which means two sets of terms. Make sure you understand exactly how they will change, and how it will affect you.

Thankfully, USDA construction loans are somewhat more forgiving than most. When construction is completed, monthly payments will be due. However, the USDA will grant an extension of one year for those who need it. Be aware that this extension is given on a case-by-case basis, so there is no guarantee that it will be granted.

Finally, your intended home must also pass a USDA inspection to verify that it is in good shape. It wouldn’t make much sense to loan you money for a dilapidated home, as they would then have to loan you more money for the repair costs. It’s just easier for everyone involved when this kind of scenario is avoided.

What Are The Main Benefits Of This Kind Of Loan?

Although it isn’t particularly easy to qualify for one of these loans, they offer a lot in terms of benefits. Let’s take a look at these benefits one at a time.

No Down Payments

USDA loans and VA loans are the only government-backed loans that offer 100% financing. This means that you can get your loan without a down payment. There will certainly be some closing fees and administrative fees, but the down payment can be avoided.

Cheaper Mortgage Insurance

Mortgage insurance is kind of a last-ditch plan to help someone avoid foreclosure. Since you never know when a financial issue might arise, it pays to cover this particular base. If you opt for one of these plans, it will increase your monthly premiums. However, it also gives you a safety net against the possibility of becoming homeless. You will have to decide if this is necessary for you.

Ability To Finance Closing Fees

Although there will be a closing fee when you get this loan, that fee does not have to be paid right away. If your home is worth more than the price that you are paying, you can almost certainly finance your closing fees. It is debatable as to whether or not this is a good idea since closing fees aren’t that steep anyway.

It works like this: Let’s say you pay $200,000 for your home. However, the market value is more like $250,000. This means that you can borrow up to $50,000 for the purpose of covering closing fees, and this amount should be more than enough.

Assumability

If something goes wrong, it is possible to transfer your USDA loan to another person. Obviously, this should only be done in the case of someone you trust completely, such as a close family member. In fact, the rules encourage you to transfer the loan to a family member. According to government rules, a transfer of debt must be accompanied by an adjustment of interest rates and mortgage terms. This rule is only waived in the case of a transfer between family members.

Special Help For “Underserved” Areas

Under federal law, the USDA is required to focus a certain amount of its’ annual budget on areas that are suffering from housing shortages. Obviously, the government has chosen to use the USDA loan as an incentive for the development of impoverished areas. If your area happens to fall under this category, it could make the process of approval a lot easier.

Possibility of Rent Relief

Ever since the housing act of 1949 was amended with the Senior Citizens Housing Act Of 1962, the USDA has also been able to help certain people who are struggling to pay their rent. This program is only available for the elderly and the disabled, as they are the only ones who truly need that kind of help.

Conclusion

As you can see, this is one of the best government-backed loans out there. It’s not an option for an aspiring business person due to the stringent income requirements, but the USDA home loan program does provide a way for low-income people to enjoy the same quality of life that others enjoy.

Indeed, many people would say that it is wrong for Americans to be homeless in the middle of an economy that is producing insane amounts of wealth. Without programs like this, we can be assured that the problem would be much worse. We hope that you have enjoyed this article and that you will fill out the contact form below so that we can keep you informed about our latest research.