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Are USDA Loans Bad for You? And How You Can Get One.

1 usda loans guidelinesWondering if USDA loans are right for you?

Read on to find out more on the USDA loans and how to get one for yourself!

 

 

 

  1. What is USDA?

The agriculture department of the federal government of United States is called as the United States Department of Agriculture (USDA). It is a federal executive department which develops and executes various laws related to agriculture, forestry, farming and food.

Some of its aims are the promotion of trade in agriculture, fostering rural communities, protecting natural resources, food safety etc. The USDA runs several programs and services to achieve its mission. Some of the programs under this are the USDA loans, USDA home loans, farm loan programs, Federal State marketing improvement programs etc.

  1. What Is USDA Loan?

As part of the USDA rural development guaranteed housing loan program, the USDA offers loans/mortgages to home buyers called the USDA loans with 100% financing and reduced mortgage premiums, with below market mortgage rates.

  1. What are USDA home loans?

A home loan from the USDA rural development guaranteed housing program is called as the USDA home loan. These are also called as Section 502 loans. They are offered to individuals from rural areas aspiring to own a property & rural property owners in the United States, designed for moderate to low-income groups. This program makes housing accessible and affordable to the rural community as well as low-income groups. For the purpose of this program, around 97% of the geographic area of United States is designated as rural. Hence these loans previously considered as only farm loans, cover a wide ambit, currently. Some of the benefits of this program are:

  • No down payment
  • Very low-interest rates
  • Reasonably easy credit criteria
  • Large geographic areas come under the eligibility criteria
  • Relaxed qualifying terms
  • No loan limits.
  1. What are the types of USDA home loans?

There are two types of USDA loans, viz.

  • Single-family housing guaranteed loans
  • Single-family housing direct loans

Single-family housing guaranteed loan program

Under this program, loans are provided to applicants from low to moderate income households. This enables them to own decent, modest and adequate homes as primary residences in the rural areas that are eligible. Here the families must not have adequate housing. However, should be in a position to afford the mortgage payments, taxes, and insurance, in order to take up the USDA home loans.

The other main eligibility criteria are that the location of the dwellings should be in a rural area and with a reasonable credit history. Under this Guaranteed Home loan program, applicants can have an income of up to 115% of the median household income for that area. The term period is 30 years and these loans carry fixed rate of interest for the entire loan period.

These loans are granted by banks, which are third party institutions, and are offered through the USDA. The income range is quite broad here and these loans can be used for a wide range of areas. The areas include home upgradation, refinancing, repairs and rehabilitation of an existing property, energy efficiency upgrades etc.

Single-family housing direct loan program

The Direct loan program offers loans to low and very low-income group families, to obtain decent and safe housing in the rural areas that are eligible for this program. The program provides payment assistance to applicants in the form of subsidy that reduces the mortgage payment. This, in turn, increases the applicants’ ability to repay the loans.

According to this loan program, very low income is defined as below 50% of the area median income; and low income is defined as being in between 50% to 80% of the area median income. The funds from this loan program can be used to build, renovate or repair a home, purchase and prepare sites.

Here the requirements of borrowing are quite strict. But the loans offer flexibility in the fund’s usage as stated above. There is also an upgradation in terms of site preparation, installation of water and sewage lines, which are now eligible.

  1. How are USDA loan rates different from other mortgage rates?

The USDA loan rates are among the lowest mortgage rates. Interest rates can be as low as 1%. These are fixed rate loans. ARM’s are not available under USDA home loan programs. The private banks and mortgage firms that offer these USDA loans, give at comparatively lower rates, often much lower than the conventional loans.

These loans are safer and cheaper for these banks to lend, as they are backed by the US department of agriculture. These savings are then passed on to the home buyers in the form of lower rates. Hence these home buyers have lower monthly payments.

The USDA direct home loan interest rates are 3 % for low to very low income borrowers, according to information provided in the official USDA website.

  1. What are USDA Loans Guidelines?

To be eligible to qualify for USDA loans, certain guidelines have to be met with. These are highlighted below.

USDA loan Qualifications:

  • Meet the income eligibility:

Applicants must meet the income eligibility criteria and should be able to afford the payments. The USDA loans use debt to income ratios to determine if an applicant is eligible or not, in terms of income.

The maximum top ratio should not increase 29% of the applicants’ income while the maximum bottom ratio should not exceed 41% of the total income.

  • Have a good credit history: 

Applicants must have a good credit history with a minimum FICO credit score of 620 or above. A good credit score and credit history of an applicant demonstrate the ability of the applicant to make the payments on time and the banks/lenders check on this factor.

The applicants’ credit history should not contain two or more late payments in the last year. Also, any bankruptcy and foreclosure in the past 3 years, any federal tax liens or unpaid judgments are not accepted.

  • Meet the eligible property requirements: 

The property for which a loan is sought for should be in the eligible rural area and should be a primary residence of the applicant. USDA loans are not given for vacation homes, city homes or even working farms. They are only meant for rural homes.

A simple check on the official USDA website allows the applicant to know whether the property is eligible for a USDA loan or not.

  • Applicants should be US citizens.
  • The credit obligations and payments should be made in a timely manner.
  • The applicant should be in a legal capacity to take on the loan obligation. 

Apart from the above eligibility requirements, the USDA also requires the following criteria to be met with for the single family housing direct loans.

USDA loan requirements for direct loans:

  • The applicants should have an adjusted income that is below the low-income limit or at that limit for the area where they wish to buy the house.
  • Applicants should not have safe, decent and sanitary housing.
  • They should have the legal capacity to incur the loan.
  • The property that the applicant is buying should be the primary residence.
  • Applicants should not be debarred from any federal programs.
  • Applicants should meet the eligible citizenship criteria.
  • Apart from the above-stated requirements, the properties financed through the USDA direct loans should be 2000 square feet or of a lesser The market value should not be in excess of the applicable area loan limit.
  • The properties should not be designed for income producing activities and should not have an in-ground swimming pool.

1 how does usda loan work

  1. How do USDA loans work? 

USDA Guaranteed loans:

An applicant or an individual interested in taking up a USDA guaranteed loan approaches an approved third party lender / Bank. All the eligibility criteria should be fulfilled in order to qualify for these loans.

 

These funds can be used for a broad range of areas that include

  • Purchase of any new residential property, a new site, closing costs
  • Repairs that are associated with the purchase of the new property
  • Design features incorporated to make a dwelling accessible to a household member with physical disability
  • Refinancing eligible loans
  • Customary connection fees for utilities such as water, electricity, gas etc.
  • Any essential equipment that are to be used in the house such as ovens, washer, dryers, heating, cooling equipment etc.
  • Installation of energy efficient measures; site preparation costs etc.

 

USDA Direct loans:

The Direct USDA loans are given directly by the USDA and not by a third party lender. Hence the applicants must qualify the strict eligibility criteria. These loans are meant for individuals and families who are in financial need, to purchase a rural property.

There is some flexibility in the usage of these funds for building, renovating and even repairing a home. Site preparation and installation of sewage lines are also eligible areas where these funds can be used.

  1. Do USDA loans have a PMI?

USDA loans do not have private mortgage insurance (PMI). Instead, the USDA loans have a mortgage insurance premium that is generally 2.75% of the total loan amount.

  1. Do USDA loans have mortgage insurance?

USDA loans have a mortgage insurance premium that has to be paid. This is an upfront fee of 2.75% of the total loan amount. It is added to the loan balance at closing.

  1. Are USDA loans assumable?

Yes. USDA loans are assumable. When you assume a USDA loan, you assume the mortgage terms and its obligations. One of the biggest advantages to assume a USDA loan is that you may be getting a lower mortgage rate than the current market mortgage rate.

All the eligibility guidelines should be met with, even to assume a USDA loan. These government-backed USDA mortgage loans have assumability, thereby providing additional value to the property.

  1. Do USDA loans cover manufactured homes?

1 does usda loans cover manufactured homesYes. USDA loans typically cover only new manufactured homes. Pre-existing manufactured homes are not covered under USDA loans. Even the new manufactured homes must adhere to certain conditions such as having a minimum living space of 400 square feet, permanently affixed to a foundation. There are even a few thermal performance standards to be met.

  1. Are USDA loans a good idea?

USDA loans are a good idea, for the eligible person! However, not everyone qualifies for these loans. If you have any savings stocked up for down payment, then these loans are not for you.

Similarly, if you wish to buy a home in an urban area, these loans are not right. But if you wish to buy a property in a rural area and have a good credit score, then USDA loans are for you.  This is a fantastic opportunity for people who meet the qualification criteria, to own a home for themselves in the rural areas, without a burden of heavy down payment.

  1. What are the properties that are eligible for USDA loans?

A quick glance at the properties, that are eligible for USDA loans.

Type of property

Eligible for USDA loan

A home in urban areas No
A home in suburban, rural areas Yes
Income producing, working farms No
New construction home Yes
New manufactured home Yes
Pre-existing manufactured home No
Vacation homes No
Rental Property No
Existing home- repairs and renovation Yes
Modular property Yes ( with appraisal requirements)

 

Conclusion:

The main aim of the USDA loan program is rural development. With the help of these programs, USDA creates stable communities for households. It is the federal government’s flagship program to boost rural home ownership.

Buyers can finance 100% of the property price, with the help of a USDA loan. This can be topped with better mortgage rates that are much lower than the conventional loans. USDA loans are different on two counts, the loan type and the amount required for down payment. Another distinguishing feature is that these loans can be used by first time home buyers as well as repeat buyers.

[PDF]Income Limits – USDA Rural Development 

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