The United States Department of Agriculture (USDA) is probably not the first organization that comes to mind when you think about financing a home, but that doesn’t mean that its surprisingly flexible financing programs aren’t worth a look. Whether you’re planning to buy a single-family home in the suburbs or in the countryside, it’s a good idea to explore how USDA Rural Development financing works.
How USDA Rural Development Financing Works
Although many people assume that loans from the USDA can only be used to purchase homes in farming communities, a quick look at the program’s eligibility map proves that the program’s reach is extensive. In fact, ineligible locations are largely limited to urban centers. Homes within easy driving distance of those cities may well be deemed eligible for purchase with a USDA loan.
Suffice it to say, understanding how USDA Rural Development Financing works can come in handy for buyers in many locales. There are actually two primary USDA Rural Development Financing programs for those interested in buying a single-family home, and they work a little differently.
USDA Rural Development Single Family Direct Home Loans
USDA Rural Development’s Single Family Direct Home Loans, which are also called Section 502 Direct Loans, are designed to make homeownership more affordable for low- and very-low-income families living in rural areas. It works by providing payment assistance, which must be paid back within a 38-year term. Applicants must contact their local Rural Development office, and they should be aware that this loan program has strict limits for both applicants and the homes they plan to purchase:
- Applicants must meet eligibility income requirements, be without safe and sanitary housing, and be unable to obtain other forms of financing that offer terms that they can reasonably be expected to meet. They must be purchasing the home to serve as their primary residence, be legally capable of incurring a loan, meet citizenship requirements, and be eligible to participate in federal programs.
- Properties must be in eligible areas, which are typically rural locales with populations of less than 35,000 people. They must be smaller than 2,000 square feet, valued at less than the applicable area’s loan limit, and without in-ground swimming pools. In addition, they must be residential in nature; they cannot be designed for income-producing undertakings.
USDA Rural Development Single Family Housing Guaranteed Loans
When people talk about USDA loans, they’re normally referring to the USDA Rural Development’s Single Family Housing Guaranteed Loans. Like VA loans, these home loans are made by approved lenders and backed by the government. In this case, the USDA offers a 90 percent loan guarantee, which reduces the risk lenders take in making the loan and allows them to offer borrowers terms that are more favorable. Intended for low- and moderate-income families, these loans do come with certain requirements for both applicants and the property being purchased:
- Borrowers must meet eligibility income requirements. These vary by location and the number of people who live in the household, but they are higher than those for the direct loan program. Typically your income cannot exceed 115 percent of your area’s median income. Although perfect credit isn’t a must, applicants should also be ready to demonstrate that they are willing to meet their financial obligations. In addition, they must be purchasing the home with the intent of using it as their primary residence, be legally capable of contracting for a loan, meet the loan program’s citizenship requirements, and be eligible to take part in federal programs.
- Properties must be located within eligible areas, which range from rural communities to bustling suburbs. While opulent addresses are unlikely to qualify, homes that fall within the normal standards of their communities often will.
The Advantages of USDA Rural Development Guaranteed Loans
Why are the USDA’s guaranteed loans often described as one of the home loan industry’s best-kept secrets? As My Mortgage Insider reports, these loans come with several advantages:
- There’s no need for a down payment with 100 percent financing.
- Thanks to the government backing behind these loans, interest rates are competitive and payments are affordable.
- The upfront fee can be rolled into the loan, and annual fees are split into monthly installments.
- Mortgage insurance fees for USDA loans are among the lowest available.
At PrimeLending of Springfield, Missouri, we know home loans, and we’ve used that knowledge to reduce the headaches and complexity of the loan process for our clients. Our friendly team of financing experts will work with you to find the right home loan program for you and guide you through every step of the loan process. Whether you’re interested in a conventional loan or a government-backed mortgage, we can help you dodge common pitfalls and keep you informed so that your journey toward homeownership is as smooth as possible. To learn more about our services or schedule a consultation, contact us today.