Are you more comfortable in rural areas than the hustle and bustle of the city? If so, you may have a great loan program at your disposal. USDA loans offer borrowers 100% financing and flexible underwriting requirements, making it easy to get the financing you need for a rural home.
How Do USDA Loans Work?
The USDA offers two loan options – the guaranteed loan and the direct loan. The guaranteed loan is the most popular as it’s for low to middle income families; in other words, average families. Direct loans are for very low income families. Direct loans go right through the USDA, whereas you get USDA guaranteed loans right from a USDA approved lender.
For the sake of this article, we’ll focus on guaranteed loans. These loans provide 100% financing and have flexible underwriting guidelines including:
- 640 minimum credit score
- 29% housing ratio
- 41% total debt ratio
- Stable employment for the last two years
- No defaulted federal loans in the recent past
Before you can determine if you qualify for a USDA loan, though, you must see if you are eligible. The USDA determines eligibility based on your total household income. If you have more than one adult living in your household that makes an income, you must disclose it to the USDA. The purpose of this step is to make sure that your total household income doesn’t exceed 115% of the average income for the area.
The Property Location
We already discussed that the USDA loan is only for rural properties, but you should understand how the USDA views rural boundaries. They base the property eligibility on the latest census tract as the USDA considers areas with fewer than 10,000 people rural. You may find as you explore the map that there are areas just outside of the city lines that qualify for USDA financing.
What’s the USDA’s Role?
The USDA guarantees the loans for USDA lenders. You don’t apply for the loan through the USDA. Instead, you do everything through the lender. The underwriter will evaluate your application and loan qualifications and decide if you qualify for the loan.
Once the underwriter has all of the supporting documents to show that you can afford the loan, they must send a complete package to the USDA. The USDA then has the final say in your loan approval. If they approve your loan, then you are free to close and take possession of your home.
The USDA offers their guarantee to lenders that are approved to provide USDA loans. The guarantee promises the lender that they won’t be left high and dry should you default on your loan. The USDA will pay the lender back a portion of the funds they lost.
Paying Mortgage Insurance
The USDA, like FHA loans, charges an upfront mortgage insurance fee as well as an annual mortgage insurance. The upfront mortgage insurance equals 1% of the loan amount. You can pay this amount at the closing or wrap it into your loan amount. The annual mortgage insurance equals 0.35% of the loan amount and changes on a yearly basis as you pay the principal balance of the loan down.
You will pay mortgage insurance for the life of the loan, though. This is unlike conventional loans where you can opt out of the Private Mortgage Insurance once you owe less than 80% of the home’s value.
The USDA is a helpful tool for moderate-income families to secure 100% financing in a rural area. If you plan to move into a rural area, the USDA loan can help you get the home you want with no money down. It’s a great way to save money and get the low interest rates the USDA offers.