What is a USDA Mortgage for Homeowners?

The U.S. Department of Agriculture (USDA) home loan program allows mortgages for low-income rural residents who cannot obtain conventional mortgages.

If you reside in a rural region and aren’t eligible for a traditional loan, you may qualify for a USDA Guaranteed Loan or USDA Direct Loan.

The program of home loans was intended to assist lower-income those living in unhealthy or dangerous rural areas to purchase an apartment with modern amenities and enough space.

Based on the situation, the program will give qualified applicants one of two alternatives: a federal government guarantee for a mortgage via an institution that is commercial or an immediate federal loan. Both are zero-down loans.

Knowing what is the USDA Home Loan

USDA mortgages help low- and moderate-income families buy safe, affordable homes in rural locations.

It is the Section 502 Loan program that has been offered since 1949. It provides low-cost financing to purchase homes using Section 502 Guaranteed Loan and Section 502 Direct Loan.

Both programs offer 100% home finance to borrowers who meet the criteria.

Two types of USDA Home Loans

USDA Guaranteed and Direct Lending programs provide no-down-payment rural housing. Here are how each program works and its requirements.

Guaranteed USDA Loan

The USDA will provide 90% of the mortgage for those who get a mortgage from an institution like a bank or another commercial lender. This allows people to obtain approval for a 30-year permanent loan without a down cost.

The loan is used to purchase, build, repair, remodel, or move the primary home.

USDA Guaranteed Loans (in contrast to USDA direct loans) are subject to borrowers having to pay a loan-guarantee fee equal to 1 percent of the total amount they borrow. The price is payable by the loan provider. The borrower must also pay an annual cost of 0.35 percent of the loan amount.

Individual lenders decide on the interest rates they’ll provide borrowers with the loans they offer. Therefore it’s crucial to compare rates. How to be eligible:

  • The down payment is 0%.
  • Assets: None.
  • Debt-to-income ratio: 41%. You might still be eligible if you have a track record of more than 41% of your earnings for debt repayments while fulfilling all financial obligations.
  • Credit score: There’s no minimum requirement unless you are willing to repay the loan. It’s possible to be approved with scores of 640. You’ll have a better case if there are no outstanding payments to the credit file and demonstrate a track record of timely rental payments.
  • Income: Small to moderate, 11.5% of the area median income. Conventional loans need PMI (PMI). One year of typical or self-employed or seasonal income.
  • The property location must be located in a rural area.
  • Non-profit residence. No in-ground pools.
  • The residence must be modest compared to the land size.
  • The size must be average for the area.

Direct USDA Loan

Direct USDA loans are directly through USDA. USDA offers them, and they are available to low-income people who cannot obtain a mortgage through other sources. The average loan period is 33 years.

The interest rate on November 20, 2021, was 2.5 percent, but your actual rate could drop to a percent after subsidies. Here’s how you can be eligible for a Direct USDA loan:

  • The down payment is 0%.
  • The debt-to-income ratio is 41 percent unless other factors can be compensated, such as the habit of spending more on income to pay for homes.
  • Credit score: The ideal is at least 640. But you might be eligible even when your score is lower, or you do not have a score. It is easier to make a case if you have a few or no late dues in your credit report or evidence of non-traditional credit, like an account history for rental payments.
  • Limit on income: Low income. The limits vary by household size and size, as well as the county.
  • Location: The property must be in a rural area, defined as an area with a minimum population of 35,000 or less.
  • Property type: Primary residence, non-income-producing. The property can’t be equipped with an in-ground pool.
  • The size of the home is 2,000 sq ft or less.
  • The property size is smaller than the size that cannot be divided into smaller parcels by local Zoning laws.
USDA home loan chart

How Do I Get a USDA Home Loan?

If you are looking for a guaranteed loan, look at the USDA’s list of lenders that the USDA approves. These lenders provide USDA loans. It is essential to shop around to ensure you’re receiving the top deal.

If you want direct loans, you must submit your application direct to USDA Rural Development. The money for these loans comes from the federal government.

What Kind of Home Loans Are Available From the USDA?

The U.S. Department of Agriculture (USDA) offers two loan programs for homeowners The Section 502 Guaranteed Loan and the Direct Loan of Section 502. Both programs assist eligible low- or moderate-income buyers in buying houses in rural areas and small towns.

  • With a guaranteed loan, the USDA backs 90 percent of the loan amount. Due to that guarantee, loan providers can offer these loans at an unbeatable rate and with no down amount.
  • The USDA provides direct loans to buyers who cannot get a fair home loan through other lending institutions and those who do not have decent clean, safe, and secure housing.

What Are the Requirements for Eligibility for the Usda Home Loan?

The house must be in an area with at least 35,000 inhabitants or less, and the property must be the principal residence. The loans are available to people who have moderate or low incomes.

Income limits vary based on your area and the loan program.

In general, generally, an average credit score that is at or above 640 would be ideal. However, you could be able to qualify even with a lower score.

You are not in debt on the federal deficit and must be a U.S. citizen or a legal non-resident alien.

How Can I Apply to Receive a USDA Home Loan?

You’ll have to look up the USDA’s list of accredited lenders for a guaranteed loan. Check around to ensure you get the most favorable terms for your loan.

You’ll need to apply for a direct loan to USDA Rural Development to get a direct loan.

The Bottom Line

USDA guarantees and home mortgages assist extremely low, low- and moderate-income borrowers from areas with fewer people to get mortgages to buy modest houses with no down amount.

If you were afraid, you’d never be in a position to buy a house or be eligible for a mortgage, or reside in overcrowded or unsanitary housing, connect the USDA Rural Development and see what the housing services offered by USDA Rural Development could be able to assist you.

Frequently Asked Questions

What is a USDA home loan, and how does it differ from other types of mortgage loans?

A USDA home loan is a government-backed mortgage that requires no down payment and is for low-to-moderate income borrowers in rural areas. It offers competitive rates and looser qualifying than conventional loans.

Who is eligible for a USDA home loan, and what are the income requirements?

Eligible borrowers must meet income caps that vary by area, be unable to secure conventional financing, and purchase a home in an eligible rural location.

What are the advantages and disadvantages of obtaining a USDA home loan?

Benefits include 100% financing, low rates, and flexible credit requirements. Drawbacks are location restrictions, upfront guarantee fees, and potential for required mortgage insurance.

How can I apply for a USDA home loan, and what is the application process like?

You apply with an approved USDA lender by submitting financial documentation, getting a property appraisal, and undergoing underwriting review like with other mortgages.

Are there specific property requirements for homes eligible for USDA home loans, and how do I find eligible properties in my area?

Homes must meet minimum quality standards and be located in an eligible rural zone. The USDA’s property eligibility tool can identify qualified areas.

Kimberly Chantal Parkes

Kimberly Chantal Parkes is a former contributor to Rixloans. Kimberly Chantal is a freelance copy editor and writer with a specialization in personal financial planning. After having graduated from Kansas State University with a bachelor's degree in journalism, she began her career in media wearing many hats for community newspapers within the Kansas City area: writer as well as copy editor, photographer and coffee runner among other things.