USDA Home Loans for First Time Home Owners
Home ownership isn’t easy to achieve, saving a deposit and qualifying with a lender can be difficult. Many Americans feel the prospect of home ownership is out of reach. Fortunately, there are multiple first time home owner programs available to help individuals and families get into a home. One of the more popular programs is the USDA Rural Development Guaranteed Housing Loan.
This guide will outline all you need to know about USDA home loans - outlining how they work, the features, costs and everything else a borrower needs to know.
USDA – What It Is and How it Works
USDA loans are mortgages that are backed up by the U.S. Department of Agriculture, and are part of the USDA Rural Development Guaranteed Housing Loan (or Section 502) program. It’s a home loan program that was designed for low-income buyers who wish to purchase a home in rural areas, with benefits that may include no monthly mortgage insurance premiums, low to no down payments, and subsidized interest rates.
Even though USDA loans are insured by the government, private lenders like banks or credit unions provide the actual loans - These loans are available nationwide.
Benefits of the USDA Program
Unlike other conventional loans, USDA do not require a down payment, which allows a borrower to access 100% of the purchase price. However, they do have a 2% insurance fee, which is added in at closing. Other benefits are as follows:
- 100% financing
- No maximum purchase price. The logical home price will be determined by the person’s income.
- It allows many property types, old and new, modular or planned unit developments.
- Closing costs, as well as repair and renovation fees, can be arranged as part of the loan.
- The guarantee fee is part of the amount loaned.
- Annual mortgage insurance fee is only 0.40%.
The loans are 30-year fixed mortgages, coming with their personal USDA Streamline Refinance program.
USDA Loan Options
The USDA loans were created to benefit low-income owners, and they come with three kinds of home loan programs, all depending on your situation or use.
- Direct Loans: these are mortgages created for low and very low-income buyers or applicants. The limit on the income may vary depending on the region. If you include the subsidies, the interest rates can be as low as 1%.
- Loan Guarantees: These are issued by local lenders that participate in the USDA program, allowing you to receive low interest rates without a down payment. However, mortgage insurance is required for those who do not have a down payment.
- Home improvement grants and loans: These financial awards or loans allow owners to upgrade or repair their homes. The packages can contain grants or loans, assisting you with up to $27,500 on the spot.
USDA loans will issue direct loans for houses that are 1.800 square feet or even less. The home loan can be as high as $500,000 depending on the area you live in (places like Hawaii or California get a higher loan since they are more expensive than the countryside). A typical home loan goes at a limit of $216,840. However, the USDA covers a 90% loan note guarantee, meaning that the rest of 10% will have to be acquired through other means.
Pros and Cons of the USDA Program
Opting for a USDA loan is a great choice if you are part of a family with a small income. However, like all programs, this one also has its pros and cons. Get acquainted with them before sending in your application.
- Zero down payment
- Interest rates are generally lower than your usual conventional loans
- The seller is allowed to pay the closing costs as well as around 6% of the sale price as part of the contract negotiations
- Lifetime guarantee fee
- Financing can only be done for rural areas
- Strict limitation guidelines when it comes to income, ratios, and credit
- Can take up to 3 weeks to close
In order to be eligible for a USDA loan, the place of residence will generally have to be in the rural area. Also, the household income cannot go over 115% of the median income of the area.
Other criteria which make a buyer eligible for a USDA loan include:
- Buyers cannot have another property in the vicinity of the subject property.
- Buyers need to be able to meet a ratio of 29% of housing costs as well as a 41% of total debt.
- The buyer needs to have a decent
- The buyer mustn’t have declared bankruptcy in the past 2
- The property used for the loan needs to be the primary residence.
These guidelines are not actually black and white. When it comes to the debt-to-income ratio and the credit score, they can be rather flexible. The buyers are evaluated by the overall strength of the loan application.
How to Apply for a USDA Loan
If you believe you are in what’s considered a rural area, applying is easy. Simply visit the USDA website to check for qualified lenders in your area.
The application for a USDA loan is very similar to any other home loan. During the application process, you will be asked to provide your personal information along with the appropriate documentations (for example, the income proof), and you’ll be good to go.
Frequently Asked Questions
For those who have further questions regarding the USDA loans, here are some frequently asked questions.
- Are the mortgage rates of the USDA good?
The rates of the USDA loans are generally lower than your average 30-year mortgage rates. Since you have little to no down payment, a USDA loan can prove to be more convenient that a conventional or FHA loan.
- Can I refinance the USDA mortgage if the mortgage rates fall?
Yes, the USDA loans can be refinanced. You can get your credit verification and income checked through the USDA Streamline Refinance Program, and you won’t even need any home appraisals.
- How can I check if my house qualifies for a USDA loan?
The house needs to meet the “rural” requirement; however, the rural term is relative. What’s most important is for your home to be set in the rural area.
- How do I know if my area is eligible for a USDA loan?
If you provide your address to the website of the U.S. Department of Agriculture, you will be notified if your area is eligible for a USDA loan. They have a list of areas and communities that are eligible for a loan by census tract.
- Can a person who is not a first-time buyer benefit from a USDA loan?
Yes, the USDA house loans can be used by both first-time buyers as well as repeat buyers.
- What is the maximum mortgage loan size for a USDA loan?
There are no maximum mortgage loan sizes for this program. The only limitations you will have will be set by the household’s debt-to-income. The USDA usually limits the ratios up to 41%, except for the cases where the buyer has a stable employment, a credit score over 660 or has demonstrated good savings ability.
If you want to apply for a USDA loan, you can check here to see if you qualify. Once you demonstrated that you meet the criteria, can go to the next step of receiving a USDA loan.